Savings – Lifeline in emergencies, door to lifestyle choices

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Savings – your lifeline in emergencies and doorway to lifestyle choices

• The general rule of thumb is to set aside 3 to 6 months of emergency funds. However, we all have different needs and lifestyles.
• A sole breadwinner of the family will have to consider what the fixed expenses are and expenses that can be adjusted.
• If you are planning on switching jobs, ensure you are financially ready in case the search for the next job takes longer than expected.
• Thinking of taking a sabbatical? Calculate how much you need and build your savings before starting your break..

You know the drill – the general rule of thumb is to set aside 3 to 6 months of emergency funds. That way, cash is available when you need it, for medical costs before insurance claims are processed, or car repairs, or paying the bills when there’s a sudden loss of income.

While ‘6 months’ is a helpful guideline, let’s face it- we all have different needs and lifestyles. It is good to review how much you might need to provide for in the event that you need to dip into your savings, so that you can prepare sufficient funds accordingly.

With inflation hitting record highs,increased expenses and sluggish income growth, we may find it harder to save.. But all is not lost if we focus on the things that are within our control to better manage our finances and prevent inflation from gnawing away at the value of our money and savings. It will be prudent to review our budget regularly and reduce discretionary spending during these challenging times.

The merits of having enough savings within ready reach cannot be celebrated enough. In case of unexpected adversities in life, the peace of mind knowing you have enough money to tide you through is priceless. Your focus can then be on resolving the crisis at hand, or on supporting your loved ones. Having healthy savings also gives you choices, such as taking some time off from work to focus on other interests.

“So, how much is enough?”

Here are some factors to look out for, depending on your personal circumstances.

I am the sole breadwinner of the family

Being the sole breadwinner is a heavy responsibility. It is not just your own personal expenses that you need to provide for, but everyone else who is financially dependent on you.

How many dependents do you have and what stage of life are they in?

• A breadwinner with 2 young children has considerably lower financial commitments than a breadwinner providing for 2 young children, 2 sets of elderly parents and an unmarried sibling

What expenses can you adjust downwards so that you preserve your savings?

• Children’s tuition and enrichment?
• Car or transport expenses – Trade your car for Go-Jek, or trade Go-Jek for buses and MRT?
• Mobile plans, premier app subscriptions, grooming packages, entertainment like Netflix?

In addition to household expenses like utilities, groceries, parents’ allowance and children’s allowance, don’t forget to factor in the following when calculating how much you need to save:

• Coverage of insurance policy premiums
• Locked-in commitments to investments
• Taxes – income tax, property tax, road tax (if you own a car)
• Home mortgage repayments, if you are using cash partially or fully to fund your repayments instead of your CPF Ordinary Account funds.

With interest rates heading north, you may consider refinancing or repricing to a more suitable mortgage, if they are out of the lock-in period.

If you are experiencing tight cashflows during this period, consider paying off housing loans through your CPF OA account and maintain liquidity. You can always do a voluntary housing refund to your CPF OA in the future when your situation improves.

I am planning to switch jobs

Thinking of switching profession? Dreaming about throwing down your resignation letter with panache? Hold your horses! Before you make that move, ensure you are financially ready in case the search for the next job takes longer than you expect.

• Market uncertainties, recession or securing the right job fit might be a consideration for the delay of getting your next job.
• What lifestyle will you have between jobs? The same lifestyle you had on a full paycheck, or a more economical one?
• Do you plan to ‘take the opportunity’ while you are off work to travel or take a course? These costs are outside of your regular expenses, so you need to set aside extra.

I am a freelancer with fluctuating income

Being a freelancer will mean your income stream may be seasonal. You need to consider how often you do get paid. For example, an artist may only get paid when a job gets booked or a piece gets sold. A tuition teacher will need to consider income ‘breaks’ during off-peak seasons such as end-of-year school holidays where students tend to take a break before a new semester starts.

In addition to having savings set aside to tide over lean periods and income ‘breaks’, do also remember that all self-employed persons need to contribute mandatory Medisave if they earn an annual Net Trade Income of more than $6,000. It is also helpful to consider setting aside money for voluntary cash contributions to your CPF ordinary account (OA) or special account (SA) to grow your nest egg for retirement.

I want to take a year-long sabbatical

Sometimes you just want to take a break from everything. Sabbaticals tend to be planned, rather than caused by a sudden emergency. So this gives you time to calculate how much you need and some runway to build your savings before starting your break.

Stress-test your financials to ensure you maintain adequate funds for your long-awaited break to combat the lack of income during this period. While it is vital to have a stash of emergency savings to last you for at least 3 to 6 months to keep up with the essential financial commitments, it is important to reduce any outstanding debts and pay your bills in full to avoid chalking up unnecessary debts.

Some considerations that affect how much savings you need to set aside include:

• Will your whole sabbatical be unpaid leave, or will a portion of it be paid leave?
• What activities will you engage in during your sabbatical? Taking up a higher education certificate or specialised course will definitely set your expenses at a higher bar than your regular spend.
• Which part of the world will you be spending most of your time? The strength of the Singapore dollar to the currency of the country/countries you will be in will affect how much you need to set aside.
• Will you return to a guaranteed job after your sabbatical? If not, you need to set aside enough to cover both your sabbatical period and possible job search duration.

Building up your savings in a purposeful and methodical way should be a financial priority as it gives you greater peace of mind and lifestyle choices.

Having an overview of your financial data is important to help you keep track of your financial wellness. Since most financial plans assume an inflation rate of 3% when projecting future income flows to determine retirement adequacy. Plan for higher costs of living by assuming different inflation scenarios of 3%, 4% or 5% and work out how these different rates impact your future cash flows and retirement planning during your sabbatical to prevent inflation chipping away the value of your money.

Besides monitoring the amount of emergency savings you have, the NAV Planner provides a holistic view of your assets and liabilities.

Beyond a regular savings account, you could also consider putting some money in fixed deposits or Singapore Savings Bonds (which are capital protected and carry no early withdrawal penalty) to earn higher interest rates.

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