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How to Build an Emergency Fund (And Why it Matters)

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Is it Necessary to Have an Emergency Fund?

It’s official. US government shutdown becomes longest in history. A few weeks back, I didn’t really pay attention to the news when I was scrolling through it. I thought it was just one of the routine dramas swirling around the states under the Make Whatever Great Again Trumponomics.

Until yesterday, as I read on, I got a sick feeling in the pit of my stomach. The shutdown affects about 800,000 employees and out of which, 380,000 have been furloughed without pay. 

I’d always thought that working in the public sector is like having an iron rice bowl and will never lose peace of mind. 

Never say never…

Have you ever thought about how does the government shutdown affect people’s lives?

A sole breadwinner of the family may lose his house.

Why emergency fund is important?US government shutdown stories.

Someone is working for free after spending all savings.

Why emergency fund is important?US government shutdown stories.

Worse, it also affects the baby. Poor soul.

Why emergency fund is important? US shutdown stories.

Just because of a wall…

Folks, I’ve not gone off topic talking about random people thousands of kilometres away from us. You may be thinking how unlucky they are and sympathise with them.

But trust me, you won’t feel the pain and desperation unless you’re in the very same position. 

Have you ever imagined if the same thing happens to you one day when you wake up in the morning? This is a very real situation. 

This is exactly what EMERGENCY means!

Life is like a box of chocolates. You never know what kind of unexpected circumstances could sneak up on you suddenly.

That’s why it’s so important to have an emergency fund. It gives you peace of mind and helps foot your bills during an unexpected crisis. Be it a car breakdown, serious illness, job layoff or what not. 

3 Simple Steps to Build an Emergency Fund

A survey conducted by Bank Negara Malaysia revealed that 75% of Malaysians find it difficult to even raise RM1,000 for emergencies.

Doesn’t it sound scary to you?

Financial experts advise that you should have an emergency fund for at least three to six months of living expenses. Basically, you should stash enough money for you to survive when you encounter rough patches in life.

So, how much have you saved for rainy days? If you’re already financially well prepared for this, well done buddy.

If not, read on. 

Here’s the 3 simple steps to build an emergency fund easily.

Step 1: Find out how much 

First of all, you need to find out how much you need to save for an emergency fund. It differs based on individual circumstances.

But it should at least cover all your monthly commitments and necessities like:

  1. Mortgage payment for house/car
  2. Rent
  3. Food and groceries
  4. Utility bills
  5. Giving to parents
  6. Anything else (Pet, dating, etc.)

I’m not surprised that most people, if not all, don’t know how much they actually spend every month. I was shocked when I first realised how much I actually spend every month. How about you? 

It’s okay, you’re not alone! 

Track your monthly expenses

Track one month of your expenses will be a good start. There are a lot of useful mobile apps like Monny or Spendee can help you track your expenses easily. More importantly, it’s free! 

Well, of course you can go old-school as well. Some people may find it fun to track their numbers manually using an Excel worksheet and do a monthly reconciliation. It’s up to you.

After tracking one month of expenses, you’ll see how much you normally spend between the needs and wants. Here’s the thing. You don’t have to trim it down when you’re saving for an emergency fund. 

Don’t be prudent when come to saving money. Because that will give you a buffer for emergencies. The honest truth is that you still want to have a cup of hot latte and spend time watching Netflix with your loved ones even if you lose your job unexpectedly. If there’s a choice, wouldn’t you wish to maintain the same lifestyle even during hard times? 

Add up all the numbers and times it by three. That’s your first goal. Don’t be over ambitious when you just get started. You wouldn’t want to feel disheartened and give up at one point when you find it too difficult to meet your goal.

Always start small and take baby steps. Increase it incrementally from 3 months to 6 months after meeting your first goal.

Frankly, my take is that the optimal amount for an emergency fund should be at least twelve months of living expenses. Perhaps I’m a bit too risk-averse. I prefer planning for a contingency within my contingency plan. Predict the unpredictable! 

Step 2: Open a designated account 

Next, you should open a different account designated to keep your emergency fund only. The reality is that willpower is limited. Somehow it’s difficult to control your impulses to splurge on stuff that you really want. A new PlayStation? A new limited edition LEGO set?

That’s absolutely normal! Come on, we are just human beings. That’s why it’s important to keep your emergency fund in a SEPARATE account! 

Ditch your ATM card for the account as well. Your emergency fund must be always highly liquid but not so easily accessible. 

What you don’t see, you won’t spend.

However, just saving a chunk of money in a savings account is not good enough. The money in a low-interest savings account will lose value over time due to inflation.

If you’re a credit card user, you can place 3 months of emergency fund in a fixed deposit with one-month tenure and roll over every month. Because you’ll still have a one-month window period to settle your credit card balance in the event of emergencies. If you’ve more than 3 months emergency fund, you can place the remaining in a fixed deposit with longer term. All these can be done easily through online banking with just a click of a few buttons online.

For those without a credit card, you should have at least one month of the emergency fund that is accessible anytime.

Personally, I keep my emergency fund in ASNB fixed-price funds. Not only the risk is very low but it has also been consistently generating at least 6% returns for the past 5 years. The best part is that I can withdraw the money anytime as I wish. (Read: Amanah Saham (ASNB) Funds – Don’t regret. It’s not too late yet.)

Again, it’s your own preference.

Step 3: Automate your emergency fund 

The final step is the easiest step. You will be surprised with the astounding results.

Many people who have been living paycheck to paycheck find it challenging to even save a cent. They might have tried very hard but it just doesn’t work. 

The problem is that those people try to save only whatever is left in the account at the end of every month. They should do it the other way round, only spend whatever is left in the account on the first day of the month.

How should you do it?

Set up a standing instruction to transfer 10% of your take-home pay automatically to a designated account on the day you get your paycheck every month. It can be done within 30 seconds through online banking.

What you don’t see, you won’t spend. Remember?

“It’s not going to work. I won’t have enough money to survive for a month for doing that.” That’s probably what you’re thinking right now. 

Trust me, you’re just underestimating yourself. We, humans, are pretty good at adapting to changes. Certainly, it won’t be easy at first. But you’ll get used to it very fast and deal with your daily life with whatever you have.

Slowly but surely, your emergency fund will just grow magically without you knowing it. It’s easy-peasy. More importantly, it’s effective!

Related: How to Save Money: 5 Great Tips for You

Final Thoughts

Hey, what are you waiting for? There’s never a right time to make a change. Stop giving yourself an excuse. 

Be financial responsible is not your duty. But you owe it to your loved ones. 

Do you want your parents to worry about your financial condition forever even you’re now a grown up? Don’t you want to give your spouse the financial security before putting a ring on her finger? Think about your kid’s future as well.

Start now or never…

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