Most financial experts may have various views concerning financial matters. But, they will agree that saving up some cash for emergency needs. That it is an essential factor for healthy financial planning.
Many Singaporeans may get worried about not saving enough in the emergency funds. Different people may have various ideas regarding the amount. That is what would be considered to be enough to put away in emergency savings. It happens that what you may regard to be enough will not be sufficient to another.
This is each person has different financial plans and living standards. Some Singaporeans even wonder if it is a good idea to save a large amount. All towards the emergency savings since they might use for other ”better” things.
What Experts Advise
Many experts advise that you need to put aside some money. The amount needs to total 3-6 months of the monthly expenses. Yet, other experts advise you to save some dollars to help you get started.
From there on you can save about a year worth of your yearly income. You need to also look at other factors like how big your family is. Also, consider your living premises; whether rented or your own home. Look also at the car maintenance costs as well as your job security.
What Is Considered As Enough Or Too Much
There are different suggestions as to how much savings is enough or too much.The following tips will help you decide on the amount. This way you will know what amount is enough or is more than enough for your emergency savings:
The Emergency Savings is like Insurance Cover
The emergency savings are like an insurance. These help secure you in times of emergencies. Therefore, use the savings only if you have a crisis. The same way an insurance policy like the car insurance cover.
Just like an insurance, you only have to put away just enough. It needs to be sufficient to cover you in times of emergencies. This also avoids having your cash staying in the account earning nearly nothing. When you consider that a 3 months savings are adequate. Thus you do not need to save any more than that amount.
Disadvantages Of Over-Funding The Emergency Fund
Inability to Cover Other Financial Commitments
When you keep a lot of funds into the emergency savings. You will realize that you are not able to cover other important financial obligations. This can include settling your debts, saving for the children’s education. Additionally, it could be retirement saving and put down payment for your home.
The money can be a lot useful in doing these things rather than over-fund the emergency fund. Thus you do not need to put away more than is necessary. More so when you have more pressing debts to clear such as high-interest credit card. It is not advisable to purchase your necessities on credit. Yet you have savings in your account earning almost nothing in return.
Your Money Loses Value
Your emergency funds need to easy to access. Meaning you may only save with a moneylender institution where you can access it easily when in an emergency. It is an emergency saving and it should be accessible at any time and place.
Even then, It is advisable to pick a moneylender who will provide you higher interests on the savings. Interests on the emergency savings might not be above 1% per year. That means the interests on the savings is below the inflation rate. This will lead to you losing money to inflation.
When the average rate of inflation is higher than bank’s rates. Thus you will be losing money through your savings. This is because the worth of your savings is decreasing with time. Thus by saving up more saved on the emergency fund. Then you will end up losing more to inflation.
Consider other Options other than Overfunding your Emergency Savings
Reserving some money for emergencies will keep you from borrowing. That is from friends and relatives. It will also ensure that you do not get into debts. This could be by using credit facilities such as credit cards. Above all, it helps that you do not use some of your retirement savings.
Some retirement accounts can allow you to withdraw funds. This is often for settling medical bills with no penalty being charged. From this, you may also receive allowances for purchasing your first home. It is important that you keep in mind that money withdrawn does not earn interest. Even then, it may be better rather than get into high-interest debts in case of an emergency. This you may need to consider if you want to overfund the emergency account.
Realize that when you are no longer employed. By being unemployed reduces the benefit of the amount you may withdraw from the savings. That is provided you still are eligible.
Use The Emergency Savings to Help your Financial Plans
You might think that the bigger your emergency fund may be, the better for you. But, you need to realize that bigger savings on your emergency fund will likely be hurting your gains. You could consider the investment opportunities you may be missing as you save in the bank.
Even though different people may have different opinions and views. When it comes to the amount you need to save for an emergency fund. You may use the above tips to help determine the amount you need to have in the emergency fund. It will help not to overfund the emergency savings. Yet in the process miss out on good opportunities. The tips will help you ensure to achieve your financial plans without any strain.
This is important that you ensure that the emergency fund work. This is along your whole financial plan and never against it. A financial plan helps you cover your financial commitments on time. This can also help you invest wisely. This could be on high-return investments as you put aside small amounts for to your emergencies.