Job loss or unexpected costs from a medical crisis or car accident may leave you heavily in debt. It helps to have an emergency fund stashed away for times of crisis. Nanz Inc explains how to save for contingencies.

By: Ng Lin-Li

Why do I need an emergency fund?
Life is unpredictable and you need to be prepared to weather the rainy days. An emergency stash exists to tide you over in lean times and help you to survive. With a sizeable emergency stash, you would have sufficient funds to provide for your family while finding another job, or while dealing with a medical emergency. Without anything to fall back on, you may be forced to take out a loan or miss repayments on your home or car, which may further strain and complicate your finances in the long term.

How much do I need to put in this emergency fund?
Unemployment is one of the most common reasons for drawing on an emergency fund, so monthly spending is used to calculate the amount needed. Firstly, determine what your minimum monthly expenditure is on average, including bills, home or car payments, and other financial obligations. Leave out “luxuries” that you would do without at such a time, like gym memberships, clothing expenses and holiday budgets. Ideally you would have six months worth of living expenses in your emergency fund, with three months being the minimum. Financial guru Suze Orman suggests having eight months of savings for true protection.

Where should I keep it?
Since an emergency fund has a different purpose from an investment portfolio, it should not be put into stocks or mutual funds due to the volatility of the market, which may result in short-term losses. The emergency stash needs to be easy to access when needed and highly liquid. It is sufficient to keep your emergency fund in a savings account with no penalties on withdrawals. While these type of accounts are often not high interest-bearing, what you do get is the security of being better able to deal with the “what ifs” of life when they happen.

How do I start?
It is probably best to start a new savings account and keep that separate from your other accounts. Banks like POSB let you deposit a fixed amount every month — it can be $200, $300, $500, $1000 — into this account. Determine not to withdraw from this account — don’t get an ATM card for it so you resist the temptation to make withdrawals.

Make building your emergency fund a priority and deposit a fixed amount into your emergency fund each month or week, and make that a habit until the amount required is reached. You may target this amount to be $10,000, $25,000, $50,000. Bonuses or extra income should be directed to building up your emergency fund as quickly as possible. Don’t let it sit in your main account where, before you know it, it’s “all gone”.

An emergency fund does not guarantee problem-free living, but it does prepare you for emergencies by provide you with some resources during difficult times.

Have other good savings ideas? Share them with us!