Have you set up your Emergency Fund?
How to start from RM100
What is an emergency fund?
An emergency fund is a account with money set aside to pay for large, unexpected expenses, such as:
An emergency fund refers to savings that you set aside to cover unexpected expenses, suggests keeping an emergency fund that is at least six months of your salary. If you have other financial responsibilities, or if you have uncertain income, you could consider saving more. For example, freelancers who periodically go through dry spells of work or parents with several children may need bigger emergency funds.
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.
Have you set up your Emergency Fund?
Your emergency fund is a financial safety net that protects you from life’s unexpected events such as sudden medical expenses or the unexpected loss of a major source of income. Having an emergency fund can provide peace of mind as it prevents you from falling into debt should financial crises arise.
Where to keep your Emergency Fund?
– Somewhere that is easy to access in the event of a crisis.
– Separate from your savings account as you do not want to be easily tempted to use it.
You can now earmark/designate a new Public e-Cash Deposit Fund account as your Emergency Reserve Account (PeCDF-ERA) via Public Mutual Online (PMO). Investments made into PeCDF-ERA will be eligible for Mutual Gold Qualifying Points (MGQPs)*
Before even thinking of investing, it is my opinion that you should have your emergency fund set up first. Because, as I’ve mentioned, you want to make sure you don’t have to liquidate those investments in times of need. You don’t want distractions. You want to have that razor-sharp focus when making your investing decisions.
If you don’t already have an emergency fund set up, the very first step is for you to take out money from your savings, if you’ve got your 6 months’ worth right there, you are set. If not, you’ll have to save up. And then only do you think of investing.
Your next question should be – where do I put my emergency fund?
First, you’ll want it to be as liquid as possible. At the same time, it has to be generating interest for you because, an emergency fund could come up to a sizeable amount. For example, a RM5,000 a month salary man could have a 6-month emergency fund of RM30,000.
This is the year you’re working on a financial plan. (Hooray!)
You’ve set your goals and budgeted how to fund them. Your next step is to set up an emergency fund.
All the planning in the world won’t help if life throws you a curveball and you’re not prepared financially. Ask yourself a few questions:
- Would a RM2,500 expense throw off your budget in a big way?
- Will you struggle to pay the bills should you lose your job today?
- Would the expense of an unexpected medical issue land on your credit card? How about if you blow the engine on your car?
If you answered yes to any of those questions, you need an emergency fund.
How much do I need?
Set mini-goals. Start by saving RM1,000. Then add to it until you have one month of expenses. Your ultimate goal is to set aside 6 months of your expenses. You may want to save 6 months of expenses if you’re the sole breadwinner or have an unpredictable income.
If you’re just getting started, don’t get hung up on the big number. The important thing is to just get started.
Where should I put the money?
Keep your emergency fund in #PMO that’s liquid and accessible. But not too accessible. Meaning, put the money in a separate savings account that you can access online, but not from an ATM. (So you’re not tempted to withdraw it. You know—out of sight, out of mind.)
How do I get started?
Here are 2 options to fund your new emergency fund.
- Automate it. Have money direct deposited from each paycheck into a savings or money market account. If you set aside RM100 a week, at the end of 2 years you could have saved RM10,400.
- To build it faster, transfer money from a bonus or tax refund. Plus, if you have cash surplus at the end of a month, add that, too. (These excess cash are meant for goals like this.)
Having funds for an emergency can take a huge weight off your shoulders when you have a surprise expense, making it more of an inconvenience to deal with than a financial hardship.
Please direct contact me for more information,
1. Learn the Benchmarks
Expert recommendations for how much cash to keep in an emergency fund fluctuate. You can find compelling arguments for totals ranging from RM1,000 to more than a year’s worth of expenses.
Generally, about six months’ worth of living expenses is a good rule of thumb. But your emergency fund will serve your individual needs much more thoroughly if you take the time to work out an attainable goal aligning with your income and expenses, then adjust over time.
2. Set a Personal Savings Goal
Since the loss of income is one of the most compelling reasons to dip into an emergency fund, consider keeping the equivalent of a few months’ expenses rather than a specific amount.
For instance, if you have relative job security and no current debts, one to three months’ expenses could be sufficient. If your income source is more volatile — maybe you’re a project-based freelancer or work in an industry directly impacted by COVID-19 — a goal of saving between six months and a year’s worth of expenses may offer you more security.
Remember to keep your goal realistic, though. You likely won’t be able to save several months’ worth of expenses overnight, and reaching that goal at all may seem overwhelming. Instead, start with a smaller, shorter-term goal and increase your savings over time.
3. Evaluate Your Expenses
After deciding how many months’ worth of expenses to keep in your emergency fund, you’ll need to determine what exactly that entails.
Consider where exactly your money goes once it’s deposited into your account. You probably dedicate a large percentage to recurring monthly expenses, like rent or mortgage payments, utilities, and food, and reserve the rest for discretionary spending.
Determine which of these expenses you’d deem essential during an emergency, and use it to inform your savings goal. And given the recreation, retail, and restaurant closures resulting from the pandemic, now may be more convenient than ever to complete these calculations.
If you’ve been forced to cut back on discretionary spending back over the past few months, you may now have a clearer idea of your necessary spending during a crisis, which you can use to estimate your savings goal better.
4. Revisit Your Plan
After you’ve successfully begun making regular savings contributions or met your first short-term savings goal, take some time to go over your plan and reconsider whether it’s still the best fit.
If everything is going smoothly, you may decide you want to push yourself and increase your goal by 10 or 15%. Alternatively, if you’re not on track to save what you predicted, it may be time to revisit your budget and expenses.
And any time your situation changes, reconfigure your savings plan once again. Changes in life circumstances will necessitate a change in your savings. This adjustment could be following an income change after having kids or even when approaching retirement.
“Things come up — a car repair, a death in the family, job loss. The idea is to have that emergency fund, use it for that emergency and then build it back up.”
Regularly reevaluating your savings goal will ensure your savings remain aligned with your evolving expenses and keep your safety net growing with you over time.
5. Decide on an Account
It may seem like a small detail, but the account in which you keep your emergency fund can have big implications for your savings.
Most importantly, you should pick a safe place where you don’t have to worry about fluctuations and risks. A high-risk investment account is not likely to serve you well in an emergency.
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