A Simple Guide to Building an Emergency Fund

When it comes to personal finance, building an emergency fund is very important, as it’ll protect you from unexpected events, like medical emergencies, sudden job loss, or other urgent family needs.

Without emergency funds, even a small crisis can make you rely on borrowing money or sacrifice your savings for your long-term goals. That’s why having a safety net in place is also crucial before diving into investments or other forms of savings.

Knowing its importance now, let’s discuss some tips to keep in mind when building your emergency fund.

1.Determine the Right Amount for You

In general, it would be good for you to set aside around 3 to 6 months worth of your expenses. Personally, I would prefer to save for around 6 to 8 months worth. But don’t forget that it’s important to assess your own needs first.

For example, if your job or lifestyle involves periods of no income, like seafarers who might work for 6 months and then take 6 months off, you may need to save up for a longer period of time.

Each person has their own unique situation. So find out how much your monthly living expenses are and then aim for an amount that can cover it for a certain duration and give you peace of mind.

2. Tier Your Savings

Instead of keeping your entire emergency fund in one place, consider tiering your savings across different accounts.

What I mean by this is for example, you can put 1 to 3 months worth in a regular savings account for easy access. Then the next tier, another 1 to 3 months, could be in a short-duration bond fund. The next 1 to 3 months could be in a fixed deposit or time deposit. Then if you’re in Singapore, you can put the next 1 to 3 months on Singapore Savings Bonds.

Basically, you’re spreading your savings in a way that allows you to balance accessibility with earning potential. This can help you make your money work harder for you without sacrificing the security of having funds readily available when you need them.

3. Avoid Over-saving

Once you've reached your emergency fund target, it’s time to stop adding to it and start saving for a bucket that you can use to invest.

Having a very big emergency fund can be counterproductive because it's typically generating interest below inflation, reducing your purchasing power or the value of your money over time.

Instead, what you can do is to direct those additional savings into investments that can grow and beat inflation, ensuring that your money continues to work for you.

4. Automate Your Savings

To make saving easier and more consistent, you can automate your contributions to your emergency funds. Once completed, you can then proceed in automating the crediting of your monthly contribution to your investment accounts.

So set up automatic transfers that move money into these accounts each month. Some accounts even offer a guaranteed interest rate without requiring you to meet specific criteria, such as crediting your salary or meeting spending requirements of the bank.

This will make it easier for you to grow your savings steadily and reach your goals faster.

Now that we’ve covered this simple guide, don’t forget that building an emergency fund is more than just putting money aside—it’s about having that financial safety net that fits your unique situation. Whether you need a 3-month or 8-month buffer, the important thing is to start saving and stick to your plan.

As you build your fund, remember not to overdo it. Once you've reached your goal, shift your focus to other financial priorities, like investing, to ensure that your money continues to grow and protect your future.

As you move forward, keep in mind that consistency is key in building and maintaining your emergency fund. Regularly review your savings to ensure it still aligns with your current situation and adjust as needed.

By staying proactive, you’ll keep your financial foundation strong and ready to support you through whatever life throws your way. Follow these tips and be on your way to financial security and peace of mind.