Everything you need to know about emergency funds

Cushion yourself against unexpected financial setbacks.

We’ve all experienced unexpected emergencies in life that hit us with a big, unplanned expense - be it sudden car repairs, medical situations or even losing your job. In times like this, having an emergency fund to fall back on can provide a safety net to protect your finances.

If you haven’t gotten around to building one yet, here’s everything you need to know to get started! 

What should my emergency fund cover?

Everyone has different needs and priorities in life, so it follows that the exact amount needed in an emergency fund will vary from person to person. However, there are certain basic expenses and necessities that should ideally be covered, including:

• Rent and utilities: This includes electricity, gas, water, internet and telco bills.
• Loan payments: Be sure to keep up with any loan payments (e.g. home loans) so your debt doesn’t balloon out of control.
• Credit card bills: Similarly, clear your credit card debt as soon as possible to avoid incurring late payment charges and interest.
• Medical expenses: If you have any chronic medical conditions that require regular medication, ensure that you have enough money set aside for it.
• Insurance: These plans provide coverage for when accidents, illness or death strikes. So it’s important to keep your policies active by paying the premiums on time.
• Childcare costs: Set aside adequate funds to make sure your children’s well-being continues to be taken care of, even in difficult times.
• Groceries: Food is the most basic of needs, and keeps you and your family healthy to overcome any challenges with confidence.
• Petrol and maintenance for your car: If you drive, remember to budget for this in your emergency fund to minimise any disruptions to daily life.

How much should I have in my emergency fund?

Most finance experts recommend having between 3 to 6 month’s worth of expenses saved up, but in certain situations it may not be enough. Here are some scenarios in which you should consider setting aside more in your emergency fund:

• During times of recession, when the risk of unemployment is higher
• If you work in a high-risk industry where layoffs are common
• You don’t have a regular source of income (e.g. freelancers)
• You have many dependents to take care of financially
• You have an underlying medical condition which requires long-term treatment (e.g. chronic diabetes which requires regular consultations and medication)

How do I start building it?

Automate your savings: Creating a savings habit will help you slowly build up your emergency fund. You can get started by setting up automatic transfers to a designated bank account every month, using the Scheduled Transfers feature in your UOB TMRW app.

• Set aside your extra cash: Direct any unexpected or extra income (e.g. government payouts, cash gifts etc.) into your emergency fund.
• Start a side hustle: Supplement your day job with a side hustle to earn some extra income using your knowledge and skills - e.g. if you’re good at baking, you can consider starting a home baking business!

Where should I keep my emergency fund?

As the name suggests, an emergency fund should be a reliable source of backup money that you can access in times of emergency. So there should be 2 things to consider when deciding where to park this sum of money:

• It must be ultra-low risk or virtually risk-free.
• It must be highly liquid (i.e. you can easily access the money when needed).

It should also preferably be kept separate from your main spending account, so you won’t be tempted to touch it. Some options include:

• High yield savings account: Cash held in a bank account is generally safe and covered for up to $75,000 with SDIC. You can also earn up to 3.0% p.a. interest on your savings with a UOB One Account.
• Singapore Savings Bonds: These are safe and flexible bonds backed by the Singapore government, that are fully capital guaranteed. However, these are the least liquid option as it can take up to 1 month to redeem your funds.
• Insurance Savings Plans: Certain plans combine insurance coverage with high liquidity, that allow you to withdraw your funds when needed. 

Take small steps towards your goal today

If the sum required for your emergency fund seems big and daunting, don’t be discouraged! Think of building your cash reserves as an ongoing process - it’s not something you need to achieve right now. Just starting to do something is better than nothing. Stashing small amounts regularly over time will help you achieve your goal eventually.