As a responsible and financially conscious 44 year old Singaporean, I have heard of having x months of emergency cash reserves. With the ever-changing economy and increasing cost of living, having a safety net in place is crucial for covering unexpected expenses and emergencies, such as a sudden job loss, unexpected medical bills, or emergency home or car repairs. I have decided to save about 6 months of cash reserves.
The first step I took was determining my monthly living expenses, including necessities like rent or mortgage (fortunately I have fully settled my HDB loan), food, transportation, and utilities. I then multiplied that amount by 6 to determine the total amount of money I needed to save, which came out to be SGD$24,000. This may seem like a daunting goal to some people, but I am committed to making this a priority in my budget.
Building your own emergency funds
There are of course pros and cons of making this decision and I will name a few below.
Pros of saving 6 months of emergency cash:
Peace of mind: Having a safety net in place gives me peace of mind, knowing that I have the funds to cover unexpected expenses or emergencies, such as a sudden job loss. As financial guru Dave Ramsey says, "An emergency fund is insurance for your financial plan."
Financial stability: This allows me to maintain my standard of living even if I experience a financial setback. As Suze Orman explains, "An emergency fund gives you the freedom to do what you need to do, when you need to do it, without going into debt."
Better control over my finances: By having a solid emergency fund, I have better control over my finances and can make smart financial decisions without being pressured by unexpected expenses.
To make saving easier, I have decided to automate my savings by transferring a portion of my income into a separate savings account each month. You got to make sure that this money is not easily accessible or else you will have the temptation to draw the funds. I am also mindful of my spending and look for ways to cut costs where I can, such as reducing eating out, cutting back on entertainment expenses, or buying less junk that I don't need.
Make sure your emergency funds are not easily accessible. Keep it safe!
Cons of saving 6 months of emergency cash:
Time-consuming: Building up an emergency fund takes time and discipline, and it can be tempting to put it off. It may take several months or even years to reach your goal, but the peace of mind it provides is worth the wait.
Limited spending: In order to save enough money, I have to limit my spending on non-essentials, which can be difficult at times. For example, this may mean choosing to eat at home instead of eating out in a fine restaurant or choosing less exotic countries when deciding where to go for holidays.
Opportunity cost: By putting my money into savings, I am sacrificing the opportunity to invest in higher-yield options that could potentially provide a better return on investment. Putting in the bank and earn 1% interest is definitely eroding the value of the money due to inflation.
The idea of having emergency funds have its pros and cons. Saving 6 months of emergency cash reserves is a decision that I believe will provide me with peace of mind and financial stability in uncertain times. While it may take time and discipline, and may limit my spending, it will ultimately give me better control over my finances. What steps can you take today to secure your financial future and ensure that you have peace of mind? Share with me in the comments section below.