As we start this new year, there’s a lot of hope that 2021 will be a better year than 2020, and that our lives will resume some form of normalcy since the start of the Covid-19 pandemic. We’d all like to go around our daily lives in the way we were able to previously.
Unfortunately, 2021 has started to unfold in a similar pattern to 2020, but we should remain optimistic and hope for the best. As with any new year, it’s a great time to set goals and have a fresh start. I believe many of us will have new year resolutions this season, some of which will revolve around finances.
For many people, financial freedom, being debt free or cash rich is often on their goals or resolution list, but how many are able to achieve it? There’s a popular adage often attributed to Benjamin Franklin, the father of time management ” Failing to plan is planning to fail.” Many of us draft a new year resolution list but without proper planning, and setting goals, timeframe, and deadlines to meet, one will never achieve their plan.
When Malaysia went into our first Movement Control Order (MCO) in March 2020, many Malaysians found themselves in financial difficulty as they were not prepared to face salary cuts, reduced working hours or even losing their jobs due to the economic shutdown. News has also been circulating of those who just managed to restart their businesses or get new jobs going back to square one as a result of MCO 2.0 due to the rising Covid-19 daily positive cases, currently at the four digit mark.
Due to the uncertainty of such times, it’s important to reflect on where you are and where you want to be, as life altering events usually result in people taking a hard look at themselves to reform and transform. No doubt the pandemic has impacted many people in more ways than one, with saving habits being one of them. If you’ve planned your financials appropriately and have a sufficient emergency fund in place, you’d at least be able to support yourself and be less stressed in such times. One of the things that Covid-19 has taught us besides resilience and adaptability, is the importance of proper financial planning and having sufficient savings.
The purpose of an emergency fund is to cushion the blow should unexpected events occur, such as medical bills, retrenchment, business closure, home emergencies home or car repairs. You’ll have peace of mind and less money worries if you know you have sufficient funds to tide you through difficult times. In addition, you’ll also have more confidence to save money for other financial goals such as retirement or your children’s education if you have an emergency fund in the first place.
How Much is Sufficient for an Emergency Fund?
Your emergency fund should cover at least 3-6 months’ worth of essential expenses. Of course, you can save for more than six months; some people have up to 12 months of savings or more! It depends on:
- Family size – are you single, a breadwinner, or in a dual-earner family i.e. you or your husband/wife works?
- How closely your job is tied to economic changes
- Financial responsibility
Essential expenses are bills that you can’t stop paying such as food, utilities, household essentials, rental or mortgage repayment, car repayment, insurance and medication. Gym passes, entertainment expenses, or Starbucks coffee aren’t essential expenses.
Six months of fixed expenses is the guideline, but it’s acceptable to save more but be warned that keeping excessive funds in your bank account only is also not advisable as the money doesn’t generate additional returns for you and will be slowly eroded by inflation.
How to Start an Emergency Fund?
As with all other things in life, start with a small realistic goal. Determine an amount that you’re comfortable to set aside every month, for e.g. RM200. It doesn’t matter if you start small as long as it’s realistic and you can move forward. Once you have accomplished this, set a new savings goal that will require more effort e.g. RM500, slowly add to it until you have accumulated one month’s worth of expenses. Your ultimate goal will be to reach 3-6 months of your fixed expenses.
Where Should I Keep My Emergency Fund?
An emergency fund is all about keeping it safe. Hence, there’s no specific investment tool to keep your emergency fund, as long as it is safe, liquid and easy to access. Most people will prefer to save in a savings account or fixed deposit (FD).
The reason for putting these funds into a safe investment tool is because if the money is in high-risk investments, there’s a risk that you could lose all the money. For example, saving an emergency fund of RM15,000 earning 2% interest in fixed deposits gives you RM300. If you were to invest in the stock market and can generate 8% annually, that’s RM1,200. While an extra RM900 may be significant to you, it isn’t guaranteed as you could lose all the capital you invested in the stock market if market conditions are unfavourable.
Hence, don’t be greedy and just leave your emergency fund in a fixed deposit or savings account as the goal is liquidity, not high returns.
Life can be unpredictable so it’s important to put aside a small amount of cash each month to cushion the blow of emergencies in difficult times. Many people strive for high-risk investments where they take on unnecessary risk to earn more money but are left with no basic savings. For those who don’t have this habit, start building your emergency fund from now. Learn from the past and don’t procrastinate. Once sufficient emergency funds are set up, it’s time to aim for your next financial goal, which can be for the short, medium or long term, depending on your life goals and/or values.
About the author
Yit Wei Yeing is a registered financial planner. She can be contacted at wyyit@genexus.com.my.
