What is Emergency Funds?

Emergency funds like its name is to ensure you have enough savings as a buffer in case of emergencies. How we define emergencies? What are emergency funds for?

Examples of Emergency Funds Usage

1. Loss of employment
2. Unexpected car breakdown and maintenance costs
3. Hospitalization or medical emergencies not covered by insurance

How much Emergency Funds do I Need?

A rule of thumb is for 6-12 months of your expenses for emergency savings. What is define as your expenses:

1. Rent, Utilities, Phone Bills, Subscriptions, Monthly Bills & Contracts
2. Food, Regular Medicine Bills, Transportation Cost (Petrol & Tolls)
3. Insurance Payments, Loan Payments, Student Loans, Mortgage Loans
4. Money to Parents.

Where should I keep my Emergency Funds?

Your emergency savings need to be kept liquid and easily accessible in times of emergency. The focus is thus more on accessibility with decent returns being a bonus. 

1. 3-month equivalent: savings accounts. (Look at high-interest savings account)
2. Amount above 3 months equivalent: fixed deposits / Money-Management Platform like StashAway Simple

How to start my Emergency Funds?

It can seem daunting to save up 6 months equivalent of your expenses, especially if you have not been much of a saver in the past. You can start with these easy steps.

1. Save up MYR1,000 first. This will be your most basic start without going to debts.
2. Calculate your 3 months expenses equivalent goal. For example, if your monthly expense is MYR3,000 this is the amount to save for MYR3,000 x 3 = MYR9,000.
3. Decide where you will keep your emergency savings in whether it’s a savings account, fixed deposit or StashAway Simple (Basically, somewhere with high interest and zero to low risk)
4. Set a monthly savings goal to get you into the habit of saving. You can make it even easier by setting up an automated monthly transfer. For example, you can setup a standing instruction to transfer MYR1,500 per month from the bank account your pay goes into your account holding your emergency funds.
5. Do not touch the emergency funds unless it is really an emergency!

What can I do to build my Emergency Funds if I don’t have any money leftover every month?

Start by going through your expenses in detail. Are there any unnecessary expenses that you can cut that you can channel into your emergency funds?

Next look into your income. Can you generate additional income by working overtime or starting a side hustle? Is there annual income such as a bonus which you will receive that you can set aside firstly for your emergency savings?

Take advantage of any opportunities available to you such as when you get an increment or pay less for your loans after a rate cut to channel the additional funds into your emergency savings.

Emergency Funds FAQ

Q: Should I use 6 months of my expenses OR income as my emergency funds goal?
A: 6 months of expenses would be the suggested emergency funds goal to work towards.

Q: What is considered an emergency?
A: A simple question you can ask is if it is a want or can the spending be delayed, it’s most likely not an emergency. An emergency is when you need, to fork out a lump sum of cash on the spot (Example: Lost of Job, Medical Expense (Not covered by insurance), Unexpected car maintenance (Not your quarterly service but accidents, engine issue)

Q: Can having too much emergency funds be bad?
A: If you have up to 12 months of expenses equivalent as emergency funds you should be doing fine. Try not to have more than 12 months of Emergency Fund as they are likely not working hard for you. You may be better off investing the money into investment assets which will generate you much better returns, especially once compounded over a period of time.

P.S: I’m no financial expert/professional adviser on finance. I am a regular person who wants to give back by sharing my personal knowledge. This is for your information from me and I hope it assists you on some financial knowledge 🙂