Emergency Fund: What It Is and Why It Matters

What is an emergency fund?

An emergency fund is a bank account with money set aside to pay for large, unexpected expenses, such as:

• Unforeseen medical expenses.
• Home-appliance repair or replacement.
• Major car fixes.
• Unemployment.

Why do I need an emergency fund?

Emergency funds create a financial buffer that can keep you afloat in a time of need without having to rely on credit cards or high-interest loans. It can be especially important to have an emergency fund if you have debt, because it can help you avoid borrowing more.

Start to save early. Don’t wait for an ideal time. The sooner you start, the more your savings will be. Aim to save at least 10% of your income every month before you spend. Raise your savings as and when you receive extra income, e.g. when you receive a bonus. Keep your money in a fixed deposit account. With higher interest compared to a savings account, your savings will grow faster.

Save before you spend and not vice versa.

Most people do this:

INCOME less SPENDING = Balance used for SAVINGS or INVESTMENT

The way to go:

INCOME less SAVINGS or INVESTMENT = Balance used for SPENDING

This way, you can be sure that you have some savings from the income earned each month

Warning signs of bad spending habits

1. You use your savings to pay current bills.
2. You pay the minimum amount which is due on your credit card.
3. You always borrow to make it from one pay day to the next.
4. You pay only the minimum amount of your repayments which are due and do not reduce your total debt.
5. You find yourself arguing with your spouse or family members about money

Emergency Fund

Consider an emergency fund of three to six months of your monthly spending to meet sudden events and payments. In this way, you can stay away from getting into debt when there is a sudden need for money. However, do not use the money from the funds to meet your normal spending or to meet your financial goals.

Steps in building an emergency fund

1. Work out your total monthly spending, e.g. housing, groceries, transportation, utilities and other debt repayments.

2. Decide the number of months of monthly spending you would like to have in your emergency fund.

3. Work out your total emergency fund, i.e. total amount of monthly spending in step 1 multiply by the number of months in step 2.

4. Put funds into your emergency fund.