Why You Need an Emergency Fund

No matter how prepared you think you are, life has its way of throwing things at you without warning. 

What if your car suddenly breaks down? Or worse, what if you lose your only source of income?

These are all things that can happen to anyone. This is where an emergency fund can come in handy. 

What is an emergency fund? 🤔

An emergency fund is money you set aside for any unexpected situations in the future –  like a job loss, medical emergencies and disasters. As you can already tell, these emergencies can be very expensive. An emergency fund is not optional; it is a necessity. 

The problem is many Malaysians do not have enough savings; let alone an emergency fund. 54% of Malaysians do not have enough savings to last them more than 3 months.

How much cash should you put in your emergency fund? 🧮

Typically, your emergency fund should cover at least 3-6 months of expenses. However, with inflation on the rise and experts warning of a recession, it has been recommended to increase the amount to 9 – 12 months. 

First, calculate your monthly expenses. Add up your bills, loan payments, food expenditure, as well as transportation for one month. 

Example: You spend up to RM2,400 monthly. 

Then, multiply that amount by the number of months. 

Example:

RM2,400 x 9 months = RM21,600

That’s your emergency fund target amount. 

How do you save for an emergency fund? 💸

If you do not have that amount yet, you can set aside a portion of your current savings for your emergency fund. 

For example, you currently have RM15,000 in your emergency fund.

Now, calculate how much left that you need to save to reach your emergency fund target:

RM21,600 (Target) – RM15,000 = RM6,600

Where is a good place to keep your emergency fund? 🛡

Keep your emergency fund in a separate account from your spending account. This way you avoid dipping into it for non-emergency related expenditures. It’s also important that the account allows you to withdraw anytime, as we never know when disaster strikes. You can put it in a savings account or a highly liquid low-risk money market fund (like Versa Cash!) that gives you steady returns, growing your emergency funds over a long period of time.  

Never put your emergency fund in risky investments! You may not be able to access it when you really need it or worse; experience losses. 

Overall, an emergency fund is a great safety net for any bumps you face along the way. It can also help you save money and become better at spending intentionally!