Savings – Lifeline in emergencies, door to lifestyle choices

Savings – Lifeline in emergencies, door to lifestyle choices

NAV TL;DR

If you don’t have time to read through the whole article, you can check out our short version below:

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 you expect.
  • Thinking of taking a sabbatical? Calculate how much you need and some runway to 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 replacing a broken down refrigerator, or 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.

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.

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.

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. 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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