- How Much To Save For Emergency Fund
- Here’s Why Everyone Needs An Emergency Fund In Singapore
- The Ideal Amount To Save In Your Emergency Fund
- Emergency Fund Singapore: How To Start And Grow Your Reserves
How Much To Save For Emergency Fund – An emergency fund is a savings account designed to help with life’s unexpected emergencies. It’s also a huge step toward financial peace of mind. The infographic below shows you how to set up an emergency fund in 5 steps.
Everyone should have money set aside in case an emergency arises. Saving for an emergency fund can be a long and boring process, and some people don’t like the thought of having too much money in a low-interest savings account. It’s easier to achieve a big goal by breaking it down into a few manageable steps. Follow the 5-step process to a fully funded emergency fund that will satisfy both the risk-averse and risk-seekers:
How Much To Save For Emergency Fund
If you currently have no savings, your first goal should be $1,000 in savings. Open a savings account dedicated solely to your emergency fund. Many banks (including Ally Bank and Capital One) allow you to open an online savings account with no fees or minimums. Typically, online banks allow you to open multiple savings accounts if you want sub-accounts for specific reasons (vacation account, gift account, down payment savings account, etc.). Make sure you open one account specifically for emergencies. Focus on getting to $1,000 as quickly as possible.
Here’s Why Everyone Needs An Emergency Fund In Singapore
After you reach $1,000 in your savings account, your next goal should be to increase the value of your savings account to $3,000 or one month’s worth of expenses (whichever is greater). Achieving this savings benchmark gives you the peace of mind that if you lose your job, you’ll at least have a little breathing room.
Saving from $3,000 to 3 months can be a bit difficult. It may take a little longer to complete step 3 compared to steps one and two, but it is well worth the effort. If you have three months of savings, it means you are well prepared for life’s emergencies. If you lose your job, you don’t have to take the first job that comes along. You will also be better prepared financially to deal with a major medical emergency.
A lot of financial advice tells you to set aside three months of expenses in an emergency account. I don’t think you should stop there. Part of the Step 4 process is building on the good savings habits you developed in Steps 1-3. At this stage you should still be putting the money aside in a savings account (I know it’s boring, but for you risk seekers there is hope in step 5).
Once you hit your six-month savings spend, you’re done, right? No, that’s where the fun begins. Many people think that having six months of expenses in a savings account is stupid, and that they would rather invest some of the money in something that has a higher return potential. When you’ve reached step 5, you’ve demonstrated a disciplined ability and willingness to save, so give yourself a pat on the back.
The Basics Of An Emergency Fund: For What And How Much
While I believe everyone should strictly follow steps 1 through 4, step 5 allows for wiggle room depending on your thoughts and attitude toward risk. Remember, personal finance is personal. You have a number of options for your current savings/investment money:
Leave six months’ worth of expenses in a savings account and start investing the extra money you have in the future. Investing would be done through a separate securities account. Option 1 is the conservative option for those of you who don’t want to take any risks with your emergency fund.
If you’re the type who doesn’t want to have that much in a savings account, then option 2 is for you. At step 5, you will have saved 6 months of expenses and are ready to build on that amount.
Anytime you invest in stocks with a diversified portfolio, be prepared to lose 50% of that money. Using that logic, if you have two months of expenses invested in stocks, you should be prepared for them to be halved in one month of expenses. Once you reach the six-month savings threshold (step 4), you can start investing all your extra money in stocks. Additionally, you can start slowly moving the money from your emergency fund into savings using the 50% potential loss rule. The rules work as follows:
Money Tips: Your Essential Guide To Building An Emergency Fund
Suppose you have seven months’ worth of savings and you want to start investing the money. You can take two months’ worth of expenses and invest the money in a diversified stock portfolio. Then you have five months of costs left in savings and two months invested. Because you could lose 50% of the value you invest in stocks, take half of the two months, and treat it as just one month, for a total of six months (5 months + 1 month). The key is to always have at least six months. Months of expenses are accounted for through a combination of savings and investments.
Once you have a full year of savings, you can invest 100% of your emergency fund in the stock market if you wish. That’s because if you lose half of twelve months’ worth of expenses, you still have six months’ worth of expenses.
Whatever you do, don’t be complacent and stop saving when you get to step 5. Make saving and investing a consistent part of your financial plan for the future. Follow the steps in order. Don’t create shortcuts. Don’t start investing your emergency fund until you get to step 5. There are many benefits to having an emergency fund. Take the time to get it right and follow the five steps. You can’t afford it – so you have to take out some credit to help cover it, and more debt piles up.
Then something else happens. But there are no more savings – and more debt needs to be paid off to cover it.
The Ideal Amount To Save In Your Emergency Fund
Unfortunately, it’s an all-too-common problem, and if you follow anyone in the process of paying off debt, you may have seen it happen or experienced it firsthand.
We can prepare for emergencies. We can have money in the bank ready to cover us for things that come up that mess us up, and pay it off without causing any stress.
I don’t know about you, but I hate that feeling of panic, where you know you can’t afford to pay for the thing that’s broken (for example) and you know you have to pay for it, and possibly as a result, incurs a number of debts.
I’ve been there – where I had £0 extra cash, and if something came up I couldn’t afford it. These weren’t always emergencies either: when my friends invited me to dinner, I didn’t have the money for it. It was a very, very difficult time for me.
How Big Should My Emergency Fund Be?
Now you’ll be happy to know that I’m in a much better place. I live with my boyfriend and my daughter and we are in the process of buying a house.
We have an extra income, we work hard and we are sure that we can afford any emergencies.
The difference in my mental health from financial peace is HUGE – and I want that for you too.
Wondering where to start? Visit the Free Resource Library to download the checklist below. It’s for your 52 week money challenge!
How To Calculate Your Emergency Fund Goal
First of all, you need to make a budget. You don’t know how much reserve you have each month without first making a budget.
Write down all your income, and then all your expenses – both fixed and variable. Check your online banking and bank statements to see how much you spend each month.
The amount you have left over each month is what you can use for your goals, which in this case would be building your emergency fund.
Once you know how much money you have left over each month, you need to put that money to work. The job can be whatever you want, but it’s a good idea to work on a Zero Sum budget – essentially leaving you with $0 in your account because it’s all there for a job.
Why Every Hong Konger Should Keep An Emergency Fund
That doesn’t mean you don’t have to have money, but that you should spend your extra money on things so it isn’t used for random purchases.
The point is, to make sure you put money toward savings, you can treat your savings like a bill and have it automatically deducted from your account if that works best for you.
This is a personal decision – I’ve seen people with $100, I’ve seen people with $10,000 or more – it comes down to personal preference and how much money you need to live on.
Emergencies are something that we know will happen – but the type of emergency, and its magnitude… will vary enormously from
Emergency Fund Singapore: How To Start And Grow Your Reserves
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