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Building up your Emergency Fund

If you faced an emergency and needed to cover an unexpected bill, would you be prepared?

Shockingly, nearly half of Singaporeans find themselves unprepared, lacking sufficient emergency funds to sustain them for six months in a crisis, with approximately 45% admitting they don’t have enough funds to meet their family’s needs for the upcoming year.

The gross domestic savings rate in Singapore, as of December 2022, stood impressively high at 49.2%, indicating that nearly half of the GDP is allocated towards savings. This figure is notably elevated compared to the global average, which hovers around 25%. (Source: CEICdata) In terms of personal savings, the third quarter of 2023 saw a personal saving rate of 31.7% in Singapore. This means that slightly over 30% of disposable income was saved during this period. While still substantial, this rate has experienced a slight decrease compared to previous quarters. (Source: Singapore Department of Statistics)

The Decline in Emergency Fund Preparedness Among Singaporeans Revealed in 2023 Survey

In a recent survey conducted in 2023, it was revealed that a mere 38% of Singaporeans have managed to establish an emergency fund capable of covering at least three months’ worth of living expenses. This figure marks a concerning decline from the 42% reported in 2022.

Furthermore, the survey brought to light a stark generational divide, indicating that younger Singaporeans are notably less likely to possess an emergency fund compared to their older counterparts. Specifically, a mere 27% of millennials (those aged 25-34) have such a financial safety net, while a more substantial 52% of baby boomers (individuals aged 55 and above) have taken the prudent step of securing their financial future in this manner. Several factors could potentially account for this disparity:

  1. Debt Burden: Younger Singaporeans may find themselves burdened by significant debts, such as student loans or housing loans. These financial obligations can make it exceedingly challenging to allocate funds toward building an emergency fund.
  2. Living Expenses: A substantial portion of younger Singaporeans may be living paycheck to paycheck, struggling to cover basic living expenses without much room for savings. This precarious financial situation leaves them vulnerable in times of unexpected crises.
  3. Awareness: Younger Singaporeans may be less aware of the critical importance of establishing and maintaining an emergency fund. Financial literacy and education could play a pivotal role in bridging this knowledge gap.

Notably, despite the relatively low percentage of Singaporeans with adequate emergency funds, there appears to be a consensus on the importance of having one. A separate survey conducted by DBS in 2022 found that a resounding 88% of Singaporeans recognize the significance of maintaining an emergency fund. This suggests that while awareness exists, addressing the barriers faced by younger generations in building their financial safety nets remains an important challenge for both individuals and financial institutions.

Significance of Having an Emergency Fund

The significance of having an emergency fund cannot be overstated. It aligns with the adage that failing to plan is planning to fail. Failing to prepare for emergencies can have detrimental financial consequences when life throws unexpected challenges your way.

The importance of an emergency fund lies in its role as a financial safety net. It provides security during unpredictable situations, such as medical emergencies or sudden job loss. Establishing an emergency fund should be a priority. While a general guideline suggests saving three to six months’ worth of living expenses, the actual amount varies based on individual circumstances. Factors like job stability, consumption patterns, and the purpose of the fund all come into play.

Choosing where to allocate your emergency fund is crucial. It should not be mingled with regular savings designated for purposes like home purchase or retirement planning. Instead, it should be kept in liquid and safe accounts.

Options include high-yield accounts offered by digital banks, investment platforms with money market solutions offering yields exceeding three percent, or Singapore government savings bonds, which allow flexible withdrawals.

Another essential piece of advice is to avoid investing your emergency fund in highly volatile assets. High-risk investments can be illiquid during times of urgent need, potentially rendering your funds inaccessible when you need them most.

How much emergency fund savings should you have in Singapore?

Younger adults, aged 25-34 years old, often exhibit lower savings rates due to various factors such as managing student loans, embarking on their careers, and potentially starting families. According to a 2021 study by DBS, the average savings rate among this demographic was recorded at 15.7%.

In contrast, middle-aged adults, typically aged 35-54 years old, tend to have higher savings rates. This age group benefits from career progression and greater income stability, leading to a higher propensity to save. The same DBS study found that the average savings rate among middle-aged adults was notably higher, standing at 24.4%.

Older adults, aged 55 years and above, prioritize saving for retirement, recognizing the importance of building a financial cushion for their later years. The DBS study revealed that this group tends to save the most, with an average savings rate of 32.1%.

The general rule of thumb is to have at least three to six months of expenses saved up in an emergency fund. This will give you a financial cushion to fall back on if you lose your job, have a medical emergency, or face another unexpected expense. The amount of money you need in your emergency fund will depend on your individual circumstances, such as your income, expenses, and dependents. If you are a single-income household or have many dependents, you may want to aim for six months of expenses in your emergency fund.

If you are a dual-income household or live with your parents, you may be able to start with three months of expenses.

Consider individuals in different life stages. A fresh graduate earning around SGD 3,000 per month, without significant family responsibilities, should prioritize identifying essential expenses versus “nice-to-haves” when setting aside funds for emergencies.

For families with children, the need for an emergency fund grows. It must cover not only both parents but also the children. The potential loss of one income must be factored in, and the fund should be sufficient in case both parents face unexpected income disruptions.

Self-employed individuals face unique challenges. Their income fluctuates, making an emergency fund even more critical. Building this fund early, covering essential expenses, is paramount before considering discretionary spending.

To effectively save for your emergency fund, consider these practical tips

  1. Budget and Expense Tracking: Begin by creating a detailed budget that outlines your income and expenses. Tracking your spending habits will reveal areas where you can cut back and redirect funds toward your savings goals.
  2. Set Clear Savings Goals: Establish a clear target for your emergency fund and break it down into manageable, monthly goals. For example, if your goal is to save six months’ worth of expenses, aim to set aside a specific amount each month, like $1,000.
  3. Automate Savings: Simplify the saving process by automating transfers from your checking account to your savings account. Setting up a recurring monthly transfer ensures that you consistently contribute to your emergency fund without having to remember to do so manually.
  4. Reduce Everyday Expenses: Identify areas where you can cut costs in your daily life. For instance, cooking at home rather than dining out, canceling unused subscriptions, or finding ways to reduce utility bills can free up funds for your emergency fund.

Remember that building an emergency fund is a vital step in safeguarding your financial future. Even if you can only allocate a small amount each month, consistent saving adds up over time and provides invaluable financial security when unexpected challenges arise.

No matter where you are in life, it’s universally agreed that an emergency fund serves as an essential financial foundation. It provides peace of mind for the future. As you embark on creating your emergency fund, remember the importance of regularly reassessing its adequacy. Life evolves, and so should your financial preparedness to meet changing needs and priorities.

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