Young Parents: How to grow & fortify your emergency fund
This article was produced in partnership with MoneySmart.
Whoop, whoop! As more approved Covid-19 vaccines are reaching Singapore’s shores, we’re raring to go full steam ahead in 2021.
To make sure we ride the Ox by the horns this year (because Year of the Ox), it’s time to focus on the important stuff that we may have been putting off — such as building our emergency fund.
Since we’re on the topic of the Covid-19 vaccine, an emergency fund is just like that — a safeguard/protective measure and not just the usual Panadol that you take when a headache comes on. It’s kind of like a stash to help you hedge against any crisis.
Basically, it’s really crucial to have. Keep reading for ways to a) save up for your emergency fund, b) supplement it, and c) strengthen it.
What’s an emergency fund and why do I need it anyway?
If you have already squirrelled away $XXX in your bank account, does that count as your emergency fund? Well, yes and no.
You see, money meant for your emergency fund is not simply savings — it’s not the money you’re saving up for your holiday, not the cash you’re stashing away for your Brompton bicycle, and definitely not the moolah you’re keeping for your home renovation/ child’s education/ retirement/ investment.
Neither is an emergency fund the cash value of your endowment fund, nor is it the total amount of your entire investment portfolio right now. That cash is illiquid, which means you cannot access it ASAP in times of urgent need.
An emergency fund is, simply put, cold hard cash that you need for a rainy day, or when something unplanned yet urgent crops up. Here are some scenarios:
- You’re suddenly retrenched, your emergency fund will help tide your family through while you find a new job
- You’re suddenly stricken with an illness or meet with an accident (touch wood) and unable to work. This emergency fund will see your family through
- Someone in your family urgently needs cash, for example to pay medical bills, fix something in the home, to send to your child who is studying overseas
And having struggled through 2020 and the Covid-19 crisis, isn’t that even more reason for you to start your emergency fund now if you have yet to do so?
How much is needed for my emergency fund?
*Screenshot of NAV Planner, for illustration purposes only
To form your emergency fund, you need to set aside 3 to 6 months’ worth of monthly expenses. For example, if you spend S$1,500 a month, you’ll need to set aside S$4,500 to S$9,000 (we recommend at least 3 months). If you’re a gig economy worker or freelancer, it’s better that you allocate 12 months’ worth of monthly expenses as your emergency fund.
Instead of fiddling with your calculator or trying to recall your monthly household spend, one quick way is to login to your digibank and click on “Plan” to get to the NAV Planner tool — which is now supercharged by SGFinDex, for an accurate view of your emergency savings by incorporating the cash deposits that you have with other banks.
Not only does NAV Planner give a great summary of your emergency savings progress (via your money-in-money-out patterns), it can even help you project how long your emergency fund can last or alert you if it’s insufficient for your needs.
Step 1: Build your emergency fund (save)
Building your emergency fund (saving) is the first step in a multi-pronged strategy (save, supplement, strengthen). If you haven’t already got an emergency fund (or if it’s not enough), an effective way to get to building it is to save consistently.
If you haven’t already done so, set up a bank account that you can use to deposit your emergency savings in (no, a rusty biscuit tin under your bed doesn’t count).
One multi-purpose bank account is My Account, which offers flexibility with no fees, for customers of all ages. With My Account, you can also add benefits to meet your changing needs.
Set aside a ratio of your income each month, depending on what’s comfortable. The rule is to save at least 10% of your income. But you can aim higher by understanding your needs and wants and controlling your discretionary spend. Part of your savings will be channelled to building an emergency fund.
Every cent saved is a victory! You can always work upwards or, during certain months when spending is higher, reduce your savings a wee bit (but do continue to save).
And remember, DO NOT TOUCH the money in your emergency fund. If you start the habit of withdrawing money from your emergency fund to use for frivolous purposes, then you’re just going down a slippery slope. On the other hand, if you’re withdrawing money to spend on needs, then you’re perhaps channelling too much money into your emergency fund at this point.
Remember, your emergency fund could be money for your children or loved ones should anything happen to you — so don’t anyhow use, okay?
Tip: If possible, always segregate your emergency fund from other savings.
John’s take-home pay is S$3,000 a month. His monthly expenses amount to S$1,500. He plans to create an emergency fund of S$4,500 (3 months’ worth). He diligently puts in 10% of his take-home pay each month, or S$300.
Here’s how long John will take to finish creating his emergency fund:
John would have saved enough for his emergency fund after just 15 months. Cash, which is easily available, should always be the main reservoir of your emergency fund.
Step 2: Grow your emergency fund (supplement)
After accumulating enough for your emergency fund, don’t stop there. You might want to consider supplementing it with some investment (i.e. grow your moolah).
You may consider the use of investments to grow the money in your emergency fund (in excess of 3-6 months of emergency cash) to accelerate the savings process. However, do note that investing always carries some risk (even if you have a hearty risk appetite).
It may also be more difficult to withdraw the funds used for investment, especially at the time when you need it the most (and urgently). Withdrawing an investment at the wrong time could also result in you losing some (or even all) of the capital invested. So do be careful if supplementing your emergency fund with this investment strategy.
For example, one product you can explore is the Singapore Savings Bond which offers risk-free guaranteed coupon payouts twice a year. Another option is the regular savings plan Invest-Saver, which adopts the dollar-cost averaging approach, from just S$100/month. Although there is still risk, this investment strategy has some pros — it removes emotions from the equation, and it is a balanced and steady approach to add stability to your investment portfolio.
As you can set it up to automatically transfer funds every month, it not only frees up your headspace, but it’s also a disciplined approach to supplement your emergency fund (with some risk, of course).
Step 3: Add on some endowment products for protection (strengthen)
Don’t forget to fortify your growing emergency fund with some protective gear (i.e. endowment products).
As we mentioned in the beginning of the article, you can strengthen your emergency fund with protection. One way to add some “armour” yet complement your emergency fund is to add on an endowment plan.
Basically, an endowment plan is one where you put money into (single or regular premium), wait for it to mature, and then take out the lump sum, which comprises both guaranteed and non-guaranteed returns. As this is an insurance plan, it typically comes with some protection, which can be helpful too.
People buy endowment plans for various reasons, some of them being:
- Forced savings
- General wealth accumulation to meet your personal financial goals
- Education (your further education or your child’s)
- Income stream (the endowment plan doles out regular payouts after a certain point)
- And so on.
With that said, what are you still waiting for? Ride the Ox by the horns this year — start taking care of you and your family’s financial needs; start building your emergency fund, PRONTO!
Open My Account on digibank
Download or login to digibank app to open a personal My Account anytime, anywhere.
For foreigners, please prepare these required documents to open My Account.
If you would like to apply for a joint-alternate My Account with another applicant above 16 years old.
For application via webpage, please prepare the required documents prior to your application.
My Account for your child
For existing POSB/DBS account holders, you can apply for a joint alternate My Account with your child online1.
1 Applicable to children below 16 years old, and do not own an existing joint alternate My Account.
Please prepare the following required documents prior to your application.
Do a financial health check
Speak to the Wealth Planning Manager today for a financial health check and how you can better plan your finances.
Alternatively, check out NAV Planner to analyse your real-time financial health. The best part is, it’s fuss-free – we automatically work out your money flows and provide money tips.
This is the third article in New Norm 2021, a series of 6 articles written in collaboration with POSB to help young families make smarter money decisions in this new Ox year.
Other articles in the New Norm 2021 series:
- Young Parents: Planning for finances in the now and future
- How to Have a Chinese “NewNormal” Year (#CNNY)
- Buying a home in Singapore in 2021
- How You Can Cautiously Invest this Ox Year
- Young parents: Protecting your finances with insurance
Tell us if this article helps you plan and achieve your financial goals
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