SETTING UP YOUR EMERGENCY FUND AND SAVINGS

What is an Emergency Fund?

Why is an Emergency Fund important?

From a financial standpoint, having an emergency fund acts as a buffer. Without it, you’ll be forced to liquidate your investments to solve your immediate emergency conundrum. And more than likely, it may not always be a good time to sell off your stocks or your investment property.

As a long-term stock investor, I plan to hold on to my stock investment for years. An emergency fund is vital for me to prevent unnecessary liquidation of my portfolio at an unsuitable time.

As mentioned earlier, peace of mind comes hand in hand with an emergency fund. Knowing that you’ve got some money squared away for a rainy day will help mentally. It’ll give you the confidence to take risks and make bold investments which you’ll never take if you didn’t have that safety net.

Most important of all, you’ll be able to make better financial and investment decisions when you have money saved up for emergencies.

How Big Should my Emergency Fund be?

Your emergency fund can be calculated in two ways. You either base it off your monthly expenses or your monthly income. Personally, I base mine on my monthly income.

As a rule of thumb, you’ll want to have 3 to 12 months of your monthly income saved up for emergencies. I suggest starting small, start saving up for 3 months, go to 6 and if you still want a bigger safety net, go for a year’s worth.

Personally, I have a 24-month emergency fund stashed away. I started off with a 6-month emergency fund. And as my investment portfolio grew, I eventually increased it to a 12-month and then a 24-month emergency fund. 

How to Set Up Your Emergency Fund.

Before even thinking of investing, it is my opinion that you should have your emergency fund set up first. Because, as I’ve mentioned, you want to make sure you don’t have to liquidate those investments in times of need. You don’t want distractions. You want to have that razor-sharp focus when making your investing decisions.

If you don’t already have an emergency fund set up, the very first step is for you to take out money from your savings, if you’ve got your 6 months’ worth right there, you are set. If not, you’ll have to save up. And then only do you think of investing.

Your next question should be – where do I put my emergency fund?

First, you’ll want it to be as liquid as possible. At the same time, it has to be generating interest for you because, an emergency fund could come up to a sizeable amount. For example, a RM5,000 a month salary man could have a 12-month emergency fund of RM60,000.

Fixed Deposits

Personally, I put mine in short term 1-month fixed deposits. I practice something called FD Laddering.

It is basically breaking that RM60,000 into a few FDs on different days of the month. This helps you lose less interest when liquidating. 

Money Market Fund

High Interest Savings Account

What Comes After I’ve Set up my Emergency Fund?

Save, Save and Save!

Investing