Emergency Fund: Why You Need It Now, and How Can You Build One

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The only predictable thing with life is its unpredictability. You lose your job one day or get hit by a speeding car. You never know what lies ahead. But the key question is – how well prepared are you financially to deal with them?

We may have no say in the uncertainties of life, but it’s in our hands how we tackle them. Starting an emergency fund is definitely a good start.

Do we really know what an emergency fund is?

Money earmarked for unexpected crises like retrenchment or a sudden illness is an emergency fund. You definitely should have medical insurance, but even that is not a foolproof guarantee. What if you lose your job, which would also mean you lose one source of insurance? Or paying the premium for your personal health insurance becomes untenable without a regular salary? An emergency fund is your best bet.

Related: 3 Ideas For Increasing Your Appetite For Saving

Generally, an emergency fund is equivalent to 3-6 months of your average expenses — which includes your meals, bills and payments, conveyance costs, loan repayments, educational expenses of your kids, etc. Simply put, if your average monthly expenses are RM 6,000, you need to have at least RM 18,000 to RM 36,000 in your bank account.

Your emergency fund must be liquid and easily accessible – it can be withdrawn and used anytime. Keeping your fund in a savings account is a good option.

A lot of us consider properties or fixed deposits as their emergency fund – they’re not. Simply because you might not be able to sell and monetise your property quickly. Similarly, fixed deposits restrict access as one cannot withdraw funds as per choice when pressed by unanticipated circumstances. It may also mean a loss of earned interest, or penalties.

Related: Why Invest in a Fixed Deposit

So what are the advantages of having an emergency fund?

Less reliance on expensive loans: With an emergency fund in place, you need not depend on loans when you require urgent cash in the face of an unanticipated development. Loans invite exorbitant interest rates and have the potential to bury you in debt if not managed well – things not desirable when one is tackling a difficult situation or even trying to recover.

Retain self-respect: We often dial up friends and family in difficult times and seek financial help to bail us out. At times, this might lead to a loss of face or even strained relations. If we have a sufficiently large emergency fund, we can rule all those possibilities out.

Freedom: Tired of your monotonous corporate life? Want to take a break to pursue something you’re really passionate about? Travel to distant lands and stay there for a while? Want to learn a new skill or return to academics? Well, you need to have an emergency fund to begin with as that’ll provide financial freedom helping you pursue your dreams.

That sounds good. But how to really go about building an emergency fund?

Starting an emergency fund might appear daunting, but there are easy practical steps you can begin with:

1. Prioritise your expenses

Decide on a certain amount that you can set aside every month after you take into consideration all your monthly expenses including repayments of loan. Put this saved money every month in your emergency fund without fail.

2. Use budgeting apps

You can also rely on technology to prioritise your expenses. Budgeting apps like BNM My Tabung allow you to set budgets and track expenses. For those who want to have a firm grip on their credit card expenses, Fast Budget can prove to be extremely helpful.  And one can also check out MoneyLover for a more detailed scrutiny of budgets and expenses with a wider range of financial tools.

Related: Save money while using your credit card

3. Automate savings

Willpower is rare, and if you feel you’re someone who lacks it, automation is the thing for you. By automating a standing instruction to make a monthly money transfer, you can pump in a particular percentage of your monthly salary to a separate bank account for the purpose of saving.

4. Expand income sources

It’s an irrefutable fact that you will find setting aside money for emergency fund an uphill task if your salary is not enough post deductions. But one could change that. Look for additional means to increase your monthly funds – you can become a tutor or a part-time driver or even participate in different online surveys. The extra cash will make a big difference.

5. Save drastically over a shorter period

Some of us prefer an aggressive approach, even when it comes to savings. You set a savings target and cut down your expenses drastically for a short period. For example, you can set a target of saving 50% of total monthly income for 1 year, and relax for some time after the target has been achieved.

6. Funnel your bonuses into your emergency fund

Bonuses are not just meant for pricey things like a new car or a grand vacation. They can also be a great opportunity to boost your emergency fund. Funnel your entire bonus to your emergency fund till your target is met, and wait for the next bonus to buy your car. Believe us, you won’t regret this decision.

7. Diversify your savings

A savings account is a good option to keep your emergency fund in because of its liquidity. There are also many high-interest savings accounts which you may consider to boost your savings. 

If you ask us, there’s nothing more critical than saving for your emergency fund. And if you feel that setting aside 3-6 months’ worth expenses isn’t enough, go ahead and increase your fund as much as you want.

Also, it’s advisable to encourage your family members and friends to build their own emergency funds and protect themselves on a rainy day.

One cannot be expected to build a fund all at once, but earmarking a good sum every month can definitely make the target achievable. Small steps will take us a long way, and put us in a far stronger position to take on any unexpected challenge that life might throw at us.

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