Have savings ready for an emergency or job loss
It may seem hard enough to save money and invest, let alone to set aside funds for an emergency. In the event that you lose your income or face an unexpectedly large expense, though, the best way to be prepared financially is to have an emergency fund.
It may seem hard enough to save money and invest, let alone to set aside funds for an emergency.
In the event that you lose your income or face an unexpectedly large expense, though, the best way to be prepared financially is to have an emergency fund.
WHY HAVE AN EMERGENCY FUND?
The goal for an emergency fund is to set aside enough money so that you can pay the bills if your income disappears temporarily, whether it is from an accident or a layoff or something else.
You may also need money for unexpected situations such as a large housing repair or a healthcare need.
Losing your income for even just a couple weeks can be devastating and force you to make painful choices if you do not have savings to fall back on.
If the loss lasts longer, it can tip you into an even worse situation.
An emergency fund gives you a buffer so that you do not run out of money to pay for rent, utilities, healthcare, food, and transport.
With the ongoing Covid-19 pandemic, that emergency fund has become even more important.
As restaurants and hotels have fewer customers and other businesses face various challenges, the chances of losing your income for at least several weeks may have increased.
An emergency fund can cover the gap.
If you get sick and are at home, or if you lose your job because of the effects of the coronavirus, you will have money to pay the bills.
Most experts recommend putting enough money in an emergency fund to cover at least three months of expenses, or preferably six months.
For those in the gig economy, POSB bank suggests setting aside at least 12 months of income.
HOW TO ACCUMULATE FUNDS FOR AN EMERGENCY
Saving enough money to pay for three to six months of essential expenses can often take months, or even years. However, given the uncertainties now with the current climate, your goal should be to set aside as much as you can, as fast as you can.
If you don’t have an emergency fund at all, target saving up at least two to four weeks’ worth of expenses.
If you have a couple of months’ worth of expenses set aside, consider increasing the amount to six months of essential expenses.
Putting money aside so quickly may mean that you need to make sacrifices. While there is no need to become an alarmist, it is time to take the hit and put whatever cash you can into your emergency fund.
The first step is to take a close look at your expenses and see what you can reduce or eliminate.
Start by listing all your expenses for the past month or two and then looking at non-essential costs you can reduce, such as subscriptions and memberships.
Consider cutting back on your phone plan, stopping music or video streaming, or ordering food delivery less often.
Rank the expenses from the most important to the least, then start at the bottom with the least important ones and eliminate them first. Avoid buying things that are not truly essential.
If there is still not enough money in your budget to put something aside, consider adding to your income by taking on gig work or setting up a small home business.
You may tutor or offer training online as a freelancer, for example, or sell items online to increase your income.
To make sure you save money every month, consider having part of your salary taken out automatically before you even see it and put it into a separate savings account.
The net result, insurance company Aviva suggests, should be that you spend less than what you earn.
While that idea sounds simple, many people struggle with it because they rely too much on credit cards or are tempted to keep up with their peers.
Learn to spend only when necessary, while still giving yourself occasional treats.
WHERE TO PUT YOUR MONEY
The money that you save should go into a safe account that is separate from your account for everyday spending.
Still, you should be able to tap the money quickly if you need it.
While savings accounts do not offer great interest rates, avoid the temptation of putting money into stocks or bonds or mutual funds that can go down in a bad market. Instead, put it into something safe.
Time deposits or money market funds are some of the better options. Even if the return is lower than for stocks, you won’t have to worry about the value of the emergency fund suddenly dropping if stocks plummet.
You may be able to boost your return by using a comparison website such as GoBear or Seedly to search for the best interest rates. You can then put your money into a time deposit with better rates.
While an emergency fund may have seemed in the past like something that you could put off until later or that you might never really need, the current situation puts the value of an emergency fund in a new light.
If you want to ensure your financial well-being regardless of what happens over the coming months and you don’t have an emergency fund or the balance is low, you will benefit tremendously from taking quick action to build an emergency fund as soon as possible.