5 Important Elements Of Emergency Fund

Most of us will go through some challenges in our personal finance throughout our whole life. Late 2019 Covid-19 virus has strike the whole world and cause many lose their job and many business force to shut down.

We do not know when will the crisis will strike on us but if we are prepared, we will not need to press the panic button. Emergency fund is one way to get ourselves prepared before crisis strike on us. At least financially we are prepared so that we have more time to find solutions to solve on the challenge that we are facing.

Preparing emergency fund is like preparing an umbrella before it is rain.

Emergency fund is the spare cash that we will need to use during financial distress. The objective of an emergency fund is to improve financial security during unexpected expenses such as illness or sudden unemployment.

The late 2019 Covid-19 has caught many by surprise that the need to lock down at home without going out to work. Many has lost their job during the period of time. With emergency fund will help us to fund for our monthly expenses during this difficulty time.

Usually the asset we keep for emergency fund is highly liquidate assets.

• Fixed Deposit. One of the most common financial instrument for emergency fund is fixed deposit account. Beside the highly liquidity, fixed deposit account offer small amount of interest which will help a bit on growing the emergency fund.
  
  The advantage of allocating emergency fund into fixed deposit incurred no cost or no charges. The set back of fixed deposit is it has minimum lock up period. If we cash out earlier then the lock up period, we will lose out some of the interest.


• Money Market. This is another good instrument to use for keeping the emergency fund. The investment behind money market are short term bond, treasury bills and bank fixed deposit.
  
  Not like fixed deposit, money market does not have lock up period. The interest is calculated in daily basis and investor can cash out anytime they like. Investing in money market also does not cost any charges. Investor can freely move in and move out their emergency fund from money market.
  
  If you do it right, some of the money market in the market come with FREE insurance.
  


• Bond Fund. This is also one of the good instrument to be used for emergency fund. Bond Fund is sensitive to bank interest rate. Therefore bond fund fluctuation is higher compare to money market.
  
  The return of Bond fund has potential to be higher compare to money market and fixed deposit if we allocate more time for the bond fund to grow. If bond fund is chosen to allocate the emergency fund, it is advisable to choose short term bond as it is less volatile.
  

When selecting the instrument for allocating our emergency fund, we must keep in mind that liquidity is the most important factor. As we do not know when we will need to cash out the money. On the other end, we may ended up very long time not cashing out the emergency fund and may have concern on losing out the investment opportunity by keeping the money in the instrument that do not generate a good return. We can always diversify the allocation into different instrument mentioned above for liquidity and better return. There is no fix answer for which instrument is the best for everyone.

Different people will have different lifestyle. How much to save is very depend on financial circumstances. The rule of thumb is having 6 to 9 months’ worth of living expenses.

For example, if our monthly living expenses is RM3,000 and if we decided to save 6 months of emergency fund, that will work out RM18,000 as the emergency fund.

Base on the Pandemic Covid-19 scenario strike the world starting from end of 2019 until the moment this article is written, the crisis has cause the world locked down for more than 6 months.

Therefore it is wise to have more than 6 months as our emergency fund.

Decide how many months of emergency fund you need to set aside. After that decide how much you want to set aside monthly from your income to allocate into emergency fund.

If you have difficulty to come out even small amount of fund for your emergency fund, you may want to look at how to cut down your monthly expenses without compromising your lifestyle.

You can also find way to increase your income. As there is no ceiling of generate additional income, the more additional income you generate, the faster you can create your emergency fund, you can check out my article on how to create additional income HERE.

The challenge is every one of us have limited time available, create additional income will take up lots of our rest time and quality time for spending with our love one. Therefore it is important we learn how to work smart instead of work hard. Learn how to automate additional income HERE.

Once you have decided your plan, take action and start immediately. As we do not know when will be the next crisis will strike us. The earlier we set up our emergency fund, the more comfortable we are.

Building our emergency fund is also building our good habit of saving. If today we are still active in work and still getting our salary and yet we cannot have the saving habit. What makes us have the capability to have the saving when we are retired or we are out of job.

We may want to build an emergency fund before we are thinking to invest into more volatile investment instrument such as equities and stocks.

If you have strong monthly cash flow and you can have more extra cash, you may want to consider saving your emergency fund and your long term investment goal at the same time. But if extra cash is limited, you should consider start up your emergency fund first before building up your other investment goals.

Once you have set up your emergency fund, then you can continue your monthly saving habit on your long term investment goal like your retirement planning, children education plan or any others financial goals.