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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 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.

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.

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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