Building an Emergency Fund: Why It's Crucial and How to Start

arrow
Personal Finance
July 17, 2023
7 mins read
Dobin user checking his emergency fund to ensure he has enough savings for unexpected expenses

It’s typical — just as it seems you’re getting on top of your money, you get a big unexpected expense that throws you off.

Whether it’s losing your job abruptly, your rent going up, or a medical emergency, there are lots of ways that life can present hurdles that make reaching your financial goals seem impossible. If the worst happens, you’re covered with cash you’ve set aside to see you through.

Financial stability isn’t easy, and one crucial part of planning for the future is realizing that everything doesn’t always go to plan. Putting aside money for an emergency fund is a great way to keep your savings on track and plan for the unexpected.

The Importance of an Emergency Fund

What is an emergency fund? It is a pool of money that you set aside specifically for emergencies. Ideally, it should be easily accessible, meaning you can get your hands on it quickly when an emergency arises.

Having an emergency fund as a financial buffer can provide peace of mind and help you navigate through tough times without resorting to credit cards, loans, or going into debt. It's all about being prepared and having a sense of financial security, helping you stay on top of your financial responsibilities and build security.

How Much Emergency Fund Is Enough?

Most financial experts recommend having three to six months' worth of living expenses stashed away in your emergency fund.

However, the exact amount you need may vary based on your individual circumstances, such as your job stability, family situation, and overall financial health. If you have a lot of responsibility, it might be worth increasing your emergency fund to cover up to 12 months of your expenses.

What’s important is making a judgment based on your specific financial situation. When determining how much emergency fund is enough, you might want to think about these issues —

1. Monthly Expenses

Take a good look at your monthly budget. Add up all those essential expenses like rent, utilities, groceries, transportation, insurance, and any debts you're tackling. This will give you a clear picture of how much money you typically need to keep the lights on, the rent paid, and the fridge stocked until you can get things back on track.

2. Job Stability

No one likes to consider losing their job but if that were to happen, an emergency fund will soften the blow. Consider how stable your job is. Are you in a rock-solid, dependable position? Or do you work in a field that's a bit like riding a roller coaster? If it's the latter, you might want to beef up your emergency fund to weather those unpredictable ups and downs.

Similarly, think about your future goals. Will you be sticking around in your job for the long term? Or do you plan on making some strategic career moves in the near future? Having a healthy emergency fund gives you a little leverage in the job market: you don’t have to jump at the first position you’re offered just to keep up with your mortgage payments.

3. Lifestyle and Loved Ones

Think about your lifestyle and any dependents in your life. Do you have little ones running around or family members who rely on your support? Your emergency fund should take their needs into account, so make sure it's a sturdy safety net that can catch everyone that relies on you.

4. Managing Risk

Your appetite for risk can play a big role in the size of the emergency fund you build. If you're more on the cautious side, consider building a bigger emergency fund to satisfy your need for financial security. This will help you put your mind at ease and give you the reassurance that you can afford to take a few risks in other areas of your life.

It’s important to note that having a low risk tolerance doesn’t mean an emergency fund is optional. Putting some money away is a critical part of financial stability, even if you’re happy with taking more risk than others.

Remember, these tips are just a starting point. You know yourself and your circumstances best. Find that sweet spot that balances your needs, risk tolerance, and desire for peace of mind, and you’re well on your way to having an emergency fund that suits your lifestyle.

Setting Realistic Savings Goals

Now you’ve got a target in mind, it’s time to start saving.

That begins with an analysis of your current expenditures and setting realistic savings goals that you can stick to each month. Some experts use the 50/30/20 rule to gauge how much they can afford to save each month. This means allocating 50% of your income to your essential expenses (think rent, utilities, groceries, and all those things you need to survive), 30% to your wants and desires (retail therapy and fun adventures), and the remaining 20% to savings and investments.

You can start with Dobin, where it’s easy to track all your expenses on one dashboard. Dobin automatically combines all the data from the accounts you choose to link to the app, helping you get an understanding of your monthly expenses and income. Then, you can easily see how much of your spending you can afford to save. You can link up to 8 banks on Dobin (DBS, OCBC, UOB, Standard Chartered, American Express, HSBC, CIMB and Bank of China).

Once you’ve got your monthly savings amount, it’s time to get to work. You’ve already considered how much emergency fund is enough, so topping up your current fund to reach that goal should be priority number one. But once you’ve got there, don’t stop saving! Keep practicing healthy money habits by investing, paying off debt early, or building up your pension pot. This will build your financial security, helping you build a secure future.

Strategies for Saving Effectively

Remember, building an emergency fund is not an overnight thing. It requires discipline and consistent effort, and you might not reach your emergency fund target for a few years. But keep at it — our number one tip for how to save money in Singapore is consistency.

Consider automating your savings by setting up a direct deposit from your paycheck into a separate savings account dedicated solely to your emergency fund. This way, you won't even miss the money as it quietly grows behind the scenes.

Another great strategy is to make sure you’re taking advantage of the interest rates available. Your emergency fund may end up being a sizable sum and there may be savings accounts available to you that help you capitalize on that, paying interest monthly or annually. Be careful, though, and don’t accidentally lock your emergency fund away. Some accounts offer great interest rates but only if the money is untouchable for a period of time. It’s critical to have your emergency fund in an accessible account so you can reach it whenever you need.

Finally, keep your emergency fund separate from other savings funds. An emergency fund is not for splurging on that shiny new gadget or a spontaneous shopping spree. Its purpose is to protect you and your financial stability when life throws you a curveball. So, keep it separate from your day-to-day expenses,or your rainy-day fund, and resist the temptation to dip into it for non-emergency purposes, and let it grow into a safety net that you can rely on when you truly need it.

Building Financial Security

We all know the importance of savings and financial goals. While no one likes to think about what could go wrong, having an emergency fund is a fundamental part of building financial responsibility.

Taking the first step to financial security means understanding your current financial situation and making data-informed decisions to improve your outlook. Building an emergency fund is no different.

The easiest way to manage your money, identify trends, and collate your financial data is with Dobin – a completely free finance app that uses open finance to help you keep on top of your financial data. Dobin views your financial information securely, then presents your information clearly in an easy-to-use dashboard. Then, Dobin matches you with financial products and special offers tailored for you. WIth Dobin, you can keep an eye on your spending and save money off the things you really buy with exclusive rewards and deals.

Download Dobin and get the insights you need to build an emergency fund that will see you through.