I hate thinking about emergencies.
It’s usually associated with panic, chaos, feelings of helplessness and at times, injury.
I’ve had my fair share of emergencies pile up:
- A serious accident that left me car-less for three weeks (I wasn’t even moving!).
- A car break-in.
- My car’s passenger window being shattered by a flying stone.
- A flat car battery in the dark, in the middle of nowhere.
- Two home break-ins that resulted in us needing security reinforcements, including an alarm system.
- Home repairs that needed to happen ASAP.
- Dental work that rang up a RM2,000 bill.
- Multiple phones dying on me.
- Last-minute flights to see family.
- Unexpected trips to the doctor or hospital.
- Unexpected income tax bills (plus penalties) from payment miscalculations I made years ago.
….the list goes on and is pretty much endless.
The other stressful thing about emergencies is that they’re usually expensive to deal with.
Some emergencies were taken care of with an output of a couple of hundred ringgit (painful but manageable), but there were others that wiped out my savings in one fell swoop.
Which brings me to why I think money set aside specifically to deal with these type of situations is a must, no matter how secure you feel financially.
You just never know what you’ll need it for, how much or when.
What’s An Emergency Fund?
The Bogleheads community (an investment resource inspired by the work and principles of John Bogle, founder of the Vanguard Group and creator of the first low-cost index fund) defines an emergency fund as this:
Having dealt with more emergencies than I can count on both hands, I decided that having an emergency fund was something I couldn’t afford to be without.
As its name implies, money in this ‘fund’ is something I never touch unless a larger-than-usual expense that blows my monthly budget out of the water crops up.
From experience, these expenses tend to fall into the one of the following categories:
- Medical or dental
- Car repairs
- Home repairs
- Phone or electronics repairs
- Travel expenses (flights, transportation, hotel etc)
And as you can tell, none of these come cheap.
5 Reasons You Need An Emergency Fund
“But I have a stable job with a good income. Why would I need to have months and months worth of cash sitting around doing nothing?” might be what you’re thinking.
Once upon a time, so did I my friend. So did I.
REASON #1: Hello, COVID-19
It seems quite a number of us have been going about our lives with barely 3 months’ worth of cash buffer in the bank, with many spending every ringgit we earned each month.
Even scarier is that more than 75% of Malaysians have trouble scraping together just RM1,000 for emergencies, says Bank Negara Malaysia.
And then 2020 rolled around and the dreaded ‘C’ word became a part of our everyday vocabulary, pulling the rug from under all our feet.
Millions of job losses and pay cuts (many of which happened literally overnight) later, one thing became very obvious: Having enough cash to cover your living expenses and then some stashed away for rainy days — and it’s been very stormy lately — is no longer optional.
It’s now a must.
We don’t know when the next pandemic or recession will come once this one’s over, but you can bet that they will….eventually.
REASON #2: Fear-Based Decisions
Over my 20-year career, I’ve worked at some amazing companies, and some not-so-great ones.
The one really bad experience that I had was such a nightmare that it gave me sleepless nights and had me waking up with soul-deadening dread at the thought of going to work every weekday morning.
In this particular situation, I made the decision to leave without another job waiting for me.
I did it because I had a sizeable cash cushion in place just in case, and investment income to keep me afloat — both comforting security blankets that allowed me to prioritise my well-being and let go of a stressful, toxic job when I wanted to without fear.
This cash cushion also gave me the opportunity to search for a better role in a less stressful environment without needing an income right now.
REASON #3: Peace Of Mind
The only explanation I can offer for this is….life.
You never know when an expensive crisis is going to crop up:
- What if you get fired from your job unexpectedly?
- What if your spouse asks for a divorce?
- What if you drop your laptop and need a new one?
- What if need to get admitted to the hospital today?
- What if you can’t find a tenant for your rental property but still have a home loan to re-pay?
On the other hand, what if there’s not crisis but you’re just plain burnt out from grinding it out at work and want to take a six-month sabbatical to regroup?
There are just too many if’s in life in life to not have an emergency fund keeping you safe, sound and secure as you go about yours.
How Much Cash Should You Have In An Emergency Fund?
The answer is it depends.
It depends on what I call your monthly burn rate or the amount of cash you need to survive.
This bare minimum amount doesn’t take into account frills like entertainment, eating out or recreational shopping, so if you want a ‘fat’ version of your burn rate that includes these aspects of your lifestyle, feel free to add them in like I have below.
To find out what your burn rate is, make a list what your household’s outflow of cash.
This includes your:
- home loan or rental payment
- utilities (phone, internet, water, electricity, condo maintenance etc.)
- transportation (including car loan payments, petrol and maintenance if you own a car)
- child care or education fees
- on-going medical bills for yourself or your family
- insurance premiums
- entertainment and eating out
- personal care
- gifts and donations
- travel (if you visit family often enough)
- other miscellaneous payments
You get the idea.
It used to be that personal finance experts would have you save a month’s worth of expenses in your emergency fund, but thanks to 2020, we all know how well that’s worked out.
The minimum has since been updated to three to six months’ worth of living expenses, which gives you a more realistic cushion, but given how unpredictable life can be, I’m personally more comfortable with a minimum of a year’s worth of cash in my emergency fund.
In fact, I’ve gone as far as setting up a three-year emergency fund, which some might say is too much cash sitting around not doing much, but the bottom line is this: Three years worth of living expenses is the amount that makes me feel secure and lets focus on living my life with peace of mind.
I recommend that you follow your gut in addition to considering your needs while figuring out how much you should have stashed away for emergencies too.
Where To Keep Your Cash Cushion
An emergency fund is meant to be money that you can access easily, since emergencies tend to be well, sudden and unexpected.
I tend to go for accounts that let me get my hands on this cash the same day or within several days, with zero penalties.
This means not locking up all of my emergency fund money in a fixed deposit (although I have made exceptions, which I’ll explain later) or unit trust fund that has redemption fees.
I also need this money to be safe, which means no high-risk investments where I could potentially lose some or all of my capital.
With this in mind, my options are narrowed down to:
- A savings account (which is fine, since my goals here are accessibility and capital preservation, not growth).
- A money market account (which is similar to a fixed deposit in terms of interest rates minus the lock-in period).
- A unit trust bond fund (this isn’t as low-risk as fixed deposits, but isn’t as volatile or risky as an equity fund or stocks either, which I’m fine with).
How I’m Managing My Emergency Fund
I’ve been stashing cash into my emergency fund religiously for awhile now and have managed to grow it into a 3-year reserve to accommodate the following situations:
- Large, unexpected expenses — a number of my everyday essentials, like my phone (3-years-old now with major battery issues), computer (turned 10 years old this year) and car (been driving it for 20 years at this point), are due for replacement, so I’m anticipating their ‘expiry’ soon.
- I’m thinking of taking a sabbatical — This is something that I do every 4-5 years in-between jobs to recharge and upgrade my skills. While I don’t know when this will happen, I want to be prepared by having a comfortable cushion tucked away and waiting for me when it does.
Because I’m still working full-time right now and don’t have liabilities or sky-high living expenses, I’ve decided to stash 100% of my emergency fund in a 3-month fixed deposit so that it’s doing some ‘work’.
I eventually plan to move a year’s worth of living expenses into a money market fund (I’ve got my eye on StashAway Simple, which has a projected 2.4% return rate) and keep the rest in a fixed deposit ladder.
The Best Time To Start: Now
If you don’t have an emergency fund, this is the advice I’d give you: Start now.
Even if you have only RM50 to put away each month, do it.
Make it a goal to have at least RM1,000 stashed away and work your way up to the number you’ve set for yourself from there.
Save as often as you can and with as much money as you can, provided you’ve already paid your debts.
The longer you live, the more curveballs life will throw at you, and the more financially-prepared you are, the more peace of mind you’ll have.