What is an Emergency Fund?
An emergency fund is a stash of Ringgit that you set aside for when an emergency happened and it turns your world upside down and you need the Ringgit to do what needs to be done. Having an emergency fund gives you the peace of mind to know that should something truly awful happen, such as losing your job, you can worry about how to deal with the emergency itself and not worry about how you’re going to survive financially.
While a person’s emergency fund will vary from situation to situation, most financial experts agree that a fully stocked emergency fund should hold between three to six months of monthly expenses.
The first amount does not matter. What is important is for you to start. On average, an emergency fund of around RM500 to RM1,500 is a good first step to build a solid emergency fund. A smaller goal is much easier to achieve and it allows you to feel accomplished once you reach this first awesome milestone.
Once you establish the small emergency fund, you can handle life’s small emergencies without going back into debt. This allows you to focus on gaining momentum when it comes to saving your Ringgit stash rather than switching back to focusing on paying off the debt incurred by small emergencies.
How do I determine what number to use for my monthly expenses?
As mentioned, an emergency fund should hold between three to six months of expenses. This to figure out the total emergency fund, one will have to look into how much is your monthly expenses. This figure varies from person to person but the important thing is that the fund can ensure that you could continue to live your life without any income. There are people who would even include luxuries in their emergency fund while others would just keep the basic amount that provides just enough money to pay the bills.
It is your choice how much you would want to keep as an emergency fund but it is important that the amount is not to exceed that you don't feel uncomfortable about it.
Why do you need an emergency fund?
A lot of people would think that it is unnecessary to prepare for an emergency fund. You might think that your job is really secure and you would have no problem to find a new job in case of lay off. Or you may have thought that using a credit card as an emergency fund is okay as long as you pay it off before the end of the month. Still, you will still need to pay off the credit card debts. Otherwise, you will have to pay for the interest and that's never good for anyone.
What is an emergency?
Financial emergencies are unexpected major expenses that require you to use an amount of money immediately. These expenses must be related to preserving your financial future, your health or your assets.
A few examples of true financial emergencies where it would make sense to use your emergency fund are as follow:
- Job loss.
- Unexpected medical expenses to maintain your health.
- Sudden unexpected car breakdown or accident
- A sudden unexpected problem with a major system in an owned house such as an air conditioner, roof or electrical system.
- A family member passes away and you need to purchase last minute travel to the funeral.
- A family member gets hurt and you need to take time off work to provide the necessary care.
What isn’t an emergency?
Some people would stretch the idea of what an emergency is to access the cash they have put away.
Examples of expenses that would not justify breaking into your emergency fund are as follows:
- Elective healthcare such as plastic surgery.
- A great deal on a cruise vacation.
- A last-minute request for you to fly to a destination wedding.
- You really want to buy a new TV for the Super Bowl but didn’t save enough
Where to put your emergency fund?
An emergency fund should be kept in a high yield savings account or a money market account. This will let you have almost instant access to the money when you really need it.
It often makes sense to keep your emergency fund at a bank separate from your main bank accounts. By doing this, you won’t be tempted to dip into your emergency fund for everyday expenses.
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