How much to save in your emergency fund?

by - June 16, 2018


Answer: A lot or zero

While statistic shows that more than half of the people can't fork out $1,000 or RM1,000 for emergency (75% in Malaysia, apparently :0), the problem with the FIRE community is that we end up saving too much.

Now, if you don't have a viable minimum asset, the good news is it doesn't have to be your reality in a year. The challenge is to save $20 every week, and you will have $1000 in 52 weeks time. It's easy to find extra $20 in a week, cut a cup of latte, sell something you don't use, offer a service, work overtime for two hours. Put the money in a separate account that you can't touch.

Back to how much to save.

Save A LOT
Experts recommend 3-6 months of expenses, and I think that's a good start. But the new average period of unemployment to hire is 9 months, and for every $10,000 you earn, the figure adds another month.

On the other hand, keeping too much money is not going to help you in the long run. It is good to find your sweet spot for the emergency fund and not losing out on inflation.

Amount of emergency savings = Debt repayment + Insurance + Life expenses

 1. Loan commitments - 1 year
Failing on loan repayments when you don't have an income is a nightmare because it hurts your credit score in the time you need most. Also, don't sign on a loan until you have saved 12 months of the installment. Financial stewardship starts before you commit.

2. Insurance payment - 1 year
Medical and life insurance are more important when you are out of work. Which is why you should save at least 1 year's worth of premium for an emergency.

3. Life expenses - 3-6 months
Saving 3-6 months of minimal living expenses is probably enough if you have your loan and insurance covered.  Then, set aside some funds for small shopping/treat to make yourself happy. I know it sounds absurd to be shopping when you are having a life crisis but hey, it's cheaper than counselling session or falling into depression.

Amount of emergency savings = Debt repayment + Insurance + Life expenses

General thumb guide:
Single: RM12,000+ debt commitments
Family of 4: RM40,000 + debt commitments

Once you got the figure, start your savings goal and put the money in a high interest bearing account. If most of your assets are liquid, you probably don't need to save much in the account but keep them invested. Keeping too much free money is not going to help you in the long run. Which is why my account is always swept clean to bonds or interest-bearing funds. (Hm..Maybe I fall under the unable to fork out RM1,000 statistic)

The alternative: Save zero
We live in such exciting times where you don't actually need to hide money under your pillow. A cost-free way to keep emergency fund is to apply and keep a few free credit card with 0% instalment facilities when things are good. Credit card interest are a red flag, but 0-2% instalment plan would proof useful when you need money.  In Malaysia, Public Bank, HLB or UOB card has offered such facilities. This would buy you 1 month and up to 1 year time to slowly liquidate your assets.

If you own 5-6 credit cards, the sum of all credit is likely to be 1.2x your annual salary, which means you can focus on saving for growth and retirement and fall back on credit card on the first two months when you need emergency funding. That's what I'll do anyway.

Conclusion
The best way to build a financial safety net is to grow your assets and creditworthiness while you can. The cost of financially vulnerable usually spillover to other aspects of life, so guard it with care.

How do you prep for a financial emergency? Which way would you prefer to save?

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