Building an Emergency Fund

What is an emergency fund?

An emergency fund is a sum of money that you set aside in the event of a financial emergency. Unpredictable life events can be expensive and may result in a personal financial dilemma. The purpose of an emergency fund is to improve your financial security by creating a safety net to meet emergency expenses.

As a rule of thumb, you should set aside at least 3 – 12 months of living expenses in your emergency fund.

Why build an emergency fund?

Emergencies will inevitably occur

Regardless of how careful you are or how frugally you live, there will be unpredictable emergencies in your life. Emergencies can crop up in various forms, through unanticipated loss of job, medical emergency or having to pay for unexpected large expenses.

Once they happen, you need to be able to overcome it while continuing to pay for your fixed monthly living expenses, such as phone bills, utility bills, insurance premium, transportation and food costs.

Keeps your stress level low

Having an emergency fund cushions you against unforeseen circumstances.

During an emergency, you are bound to already be more stressed than usual. Having an emergency fund can help limit undue stress and provide confidence in tackling such events.

Emergencies require immediate attention

Typically, when an emergency happens, you need to immediately attend to it. Be it continuing to pay for your basic living expenses or having to replace an essential broken home appliance.

Emergency funds provide the liquidity required to take care of these emergencies instantly, rather than having to borrow, seek loans or sell off investments.

What should I use my emergency funds on

Medical Emergency

Even though health insurance may protect you against hefty hospitalisation and medical bills, you may still be required to pay cash out of your pocket before you can submit your claim.

Solution: AIA HealthShield Gold Max is a private integrated shield plan (IP) that you can complement your MediShield Life coverage with.

Additionally, a serious illness or injury may require you to take some time off work. In this situation, you would want sufficient emergency funds to tide you and your family through a difficult period, as well as have bought sufficient critical illness or personal accident coverage to provide a payout as well.

Solution: AIA Beyond Critical Care is a first-in-market critical illness plan providing both physical and mental health coverage.

Unexpected Home Repairs

As a homeowner, you would be required to pay for repairs and maintenance for your home. Home repairs can be especially expensive if you have to replace appliances such as a broken air conditioner or to fix a leaking water pipe.

Furthermore, if freak accidents such as a fire or flood were to happen to your home, you have to be prepared to pay even more to restore your home. While home contents insurance such as our AIA Elite Home Care will provide extensive coverage, it is unrealistic to expect that every single thing you may have lost in such instances can be replaced.

Family Emergencies

Any emergency that involves your loved ones will impact you as well. For instance, you may be required to help your siblings out financially if they were retrenched or to fork out for your parent's medical bill. Without an emergency fund to fall back on, such stressful periods can be even more overwhelming.

Car Repairs

Upkeeping a car in Singapore is expensive. Your car requires periodic maintenance, and during such occasions, you may find that wear-and-tear to your car parts may require costly repairs and/or replacements.

Job Loss

Dealing with a job loss is one of the primary reasons for having an emergency fund. Seeking a new job is stressful and can take time. Without any savings to fall back on, you will find yourself constantly worrying about your stacking bills and contemplating how to put food on the table for your family.

Not only can the emergency fund tide you over, but you would also be able to job hunt without being overly worried, which can help you perform better during job interviews and give you adequate buffer to aim for a job that you want.

What you should not spend your emergency fund on

Amazing Discounts

Year-end Vacation

Home renovation

Downpayment on a car or investment

Tips on starting your emergency fund

Calculate
your monthly expenses

You need to set aside 3 to 12 months of your expenses, not your salary, in order to set aside sufficient emergency funds.

If you are a frugal person, this can be a lower figure. In any case, this exercise forces you to relook where your money is going, and whether you can cut down any unnecessary costs.

Keep your emergency fund
liquid and accessible

In case of an emergency, the last thing you would want is to have your emergency fund locked up in illiquid or risky assets. Thus, you should keep your emergency fund liquid in order to access it easily if there is an emergency.

Set up
a separate savings account

As the phrase “out of sight, out of mind” suggests, setting up a separate savings account will help in keeping the money away and reduces the temptation to tap on it.

Safeguard your future today

Starting your emergency fund does not have to be hard. If you have problems with committing a significant amount of your income to your emergency fund, you can always start small and gradually build up an emergency fund.

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Building an Emergency Fund

What is an emergency fund?

Why build an emergency fund?

Emergencies will inevitably occur

Keeps your stress level low

Emergencies require immediate attention

What should I use my emergency funds on

Medical Emergency

Unexpected Home Repairs

Family Emergencies

Car Repairs

Job Loss

What you should not spend your emergency fund on

Amazing Discounts

Year-end Vacation

Home renovation

Downpayment on a car or investment

Calculate
your monthly expenses

Keep your emergency fund
liquid and accessible

Set up
a separate savings account