How to Build and Where to Store an Emergency Fund

Turn your rainy days into minor inconveniences with this helpful series

• Establishing an emergency fund gives you a pot of money for “rainy days”, covering items such as a loss of job, car breakdown, home repairs or even a medical emergency.
• A decent emergency fund usually contains six months’ worth of expenses - though you don’t have to get there all at once. We usually use your after-tax take-home pay as a proxy for expenses.
• In just a few easy steps, you can easily calculate how long your emergency fund will take to complete.

How to build your emergency fund

Just like the size of your fund, the speed at which you build your emergency fund also depends on the stability of your income and household. Obstacles like debt are important to deal with as quickly as possible and may restrict your ability to build up your fund. We’ve all learnt about needs and wants in primary school, so now as a working adult, it's paramount that you now put that into practice. You guessed it, that Gucci belt is not essential! 😞

Regarding budgeting, we follow the ‘pay yourself first’ version of the 50:30:20 rule. It prioritises ‘paying yourself’ by first allocating after-tax income to savings and investments (20%), before putting the rest towards essential needs (50%), and then discretionary spending (30%). Your emergency fund contributions fall under the savings and investments category. That’s right, before essential needs! 

Why do we have this first? 

First, debt (with high interest rates) repayment is of utmost importance, so deal with this as soon as possible. By being aware of your financial goals, you can allocate your 20% accordingly. The importance of saving for long-term financial goals from an early age cannot be understated! It’s not just a chore either - there are some real benefits to it, such as early retirement. Putting 20% of what you make into your savings and investments first is the target. You don't have to start with it immediately, but once you can, try to make it 20%.

After calculating how much you'll allocate towards savings and investments, you can determine how many months you want to finish building your fund. 

For example, Mrs Lee’s leftover cash flow is $1,500 per month and she wants to save $9,000, meaning that she could aim to achieve that in six months. Alternatively, she could slowly build it up over 2 years, saving $375 per month, though of course she’d be at greater risk should something terrible happen in the meantime. 

After you’ve calculated the total amount you want to save per month, here are some additional steps to take:

• Move money aside on payday to avoid the temptation to spend it. Building up the habit of regularly saving is crucial! 
• Deposit cash gifts and bonuses straight into your emergency fund. This may not be a regular saving opportunity, but it could amount to a substantial amount of your fund!   

Following these easy steps will help you to easily accomplish your emergency fund goal. You’ll be amazed at how rapidly the fund piles up! 

Where should I keep my emergency fund?

Ideally, store emergency funds in a savings or fixed deposit account which can earn interest. This account may come with a debit card, but try not to carry it around with you! Ultimately, your emergency fund should be in a separate savings account from your main current and savings accounts. Even better, put it in an account with a different bank to add a little friction (at the cost of a little extra mental clutter). This way, it’s not as easy to withdraw until you absolutely have to in a real emergency. 

Here are some bank accounts with relatively high-interest rates where you can deposit your emergency funds in:

Interest rates as of August 2023.

*before charge

Meanwhile, in the very short term, having an available line of credit (i.e., a credit card) below your credit limit can pay for emergencies. Don't wait until you have an emergency to deal with before you apply!

Note - a credit card is not a permanent substitute for an emergency fund.

Imagine how big a relief it would be to know that you have a financial safety net in place. Being financially prepared for unexpected expenses results in peace of mind. Your rainy days are now nothing more than mere inconveniences.  

HOW TO BUILD AN EMERGENCY FUND. COMPLETED ✅

Sources:

1. https://www.khanacademy.org/college-careers-more/personal-finance/pf-saving-and-budgeting/tips-for-tracking-and-saving-money/a/how-to-establish-an-emergency-savings-fund
2. https://sg.finance.yahoo.com/news/best-savings-accounts-singapore-park-035736066.html
3. https://www.uob.com.sg/onecards/uob-one-account.html
4. https://www.dbs.com.sg/personal/deposits/bank-earn/multiplier#:~:text=No%20initial%20deposit%20required.,SGD%20%26%20foreign%20currency%20balances
5. https://www.ocbc.com/personal-banking/deposits/360-savings-account