Emergency Fund for Rainy Days
“Preparing for rainy days isn’t just about saving money—it’s about securing peace of mind and building resilience for whatever storms life may bring.”
Saving for a rainy day or emergencies is more than just a wise financial habit; it’s a cornerstone of stability and resilience in an unpredictable world. Do you remember COVID-19 where the government around the world started to restrict movement of the people? In Malaysia, the Movement Control Order (MCO) requires everyone to stay home, except for frontliners and those going out for groceries. As a salaried person, we are considered lucky when the company still pays us a salary while working from home. Some of us, including myself, are getting paid cut. For some freelancer, or self-employed, it could be no income at all. Businesses also get less sales and collection is poor.
What will happen if we lose of income, and it depends on our age, job, experience that influence how fast we can get a new job. But during the period, we still have bills to pay, need to put food on the table, children need money for school etc.
Even if we have jobs, unexpected expenses like a car repair or medical bills can arise, so having extra savings helps you handle these challenges calmly. Setting aside funds for unexpected expenses protects both your current situation and your future goals. Saving creates a safety net that helps you handle challenges without disrupting your long-term goals or peace of mind.
What is an Emergency Fund?
An emergency fund is a dedicated pool of money set aside to cover unexpected expenses such as medical emergencies, car repairs, home maintenance, or sudden job loss. It ensures that you have quick access to cash without resorting to high-interest debt like personal loan, credit card debt or liquidating long-term investments.
Why is an Emergency Fund Important in Financial and Retirement Planning?
1. Financial Planning: A Safety Net for the Unexpected
Life is unpredictable, and unplanned expenses can quickly disrupt your budget. An emergency fund provides financial stability, helping you:
- Avoid using high-interest credit cards or personal loans.
- Maintain your investment strategy without the need for premature withdrawals.
- Protect your long-term financial goals, such as saving for a house, children’s education, or retirement.
2. Retirement Planning: A Cushion Against Market Volatility
In retirement, an emergency fund becomes even more critical. It provides:
- Liquidity: Ensuring you don’t need to sell investments during a market downturn to cover sudden expenses.
- Peace of Mind: Allowing you to enjoy your retirement without constant financial stress.
- Flexibility: Covering unexpected healthcare costs or helping during periods of fluctuating income if you rely on part-time work or rental income.
How Much Should You Save in an Emergency Fund?
1. General Rule of Thumb
For working individuals, the recommended amount is typically 3 to 6 months’ worth of living expenses.
- Three Months: If you have stable employment and low financial obligations.
- Six Months or More: If you have irregular income, dependents, or are nearing retirement.
Another way of looking at it is, how fast can you get a new job with similar income/salary? This is much depends on your age, experience, seniority and type of job. We can also based on this to set up total months of emergency fund to set aside.
To be more precise, always consult your certified financial planner for advise.
2. Retirement Considerations
Retirees may need a larger emergency fund to account for:
- Higher healthcare expenses.
- Longer time horizons.
- Potential delays in pension or annuity payments.
A good rule for retirees is to have 1 to 2 years’ worth of essential living expenses in easily accessible accounts.
Steps to Build an Emergency Fund
1. Assess Your Monthly Expenses
Calculate your essential monthly expenses, including housing, utilities, groceries, insurance, and minimum debt payments. Use this as a baseline for your emergency fund goal. Without knowing this, it is not accurate when calculating the total emergency fund required.
2. Set a Realistic Savings Target
This is very dependent on the individual; how much can you start saving aside? How much money do you leave in your bank every month?
Some advised to begin with small steps. Aim for RM1,000 or your local equivalent initially, then gradually build up to your target amount.
In my opinion, you should aim to get the emergency fund ready as soon as possible as life is unpredictable. If you have extra RM 1,000 left in your savings every month, save this amount aside. If you have RM 5,000 then save this amount aside. So you can reach your emergency fund target in the shortest time possible.
If you have very little money left, for example RM 100, save it aside too as RM 100 is still better than 0. So the big challenge is when you have no money left every month. Then try the suggestion below.
3. Automate Your Savings
Pay yourself first, does this sound familiar? Set up automatic transfers to a dedicated savings account to make saving effortless. Consistency is key. Automate it is a way of force saving too.
4. Reduce Unnecessary Expenses
Identify non-essential expenses and redirect those funds into your emergency savings. Small adjustments, like cutting unnecessary subscription services like Astro, Netflix, Disney Hotstar, dining out less or cutting down your mobile phone or broadband subscriptions, etc, can add up over time.
5. Use Windfalls Wisely
Direct bonuses, tax refunds, or other unexpected income into your emergency fund to boost your savings. One of the good ideas is when you get salary increments. These increments are all going to your emergency fund. Since your monthly budget is based on the old salary, and you can still live, right?
Where to Keep Your Emergency Fund?
Your emergency fund should be:
- Accessible: Opt for a savings account, fixed deposits or money market account for quick access.
- Low-Risk: Avoid risky investments like stocks, as they may lose value when you need the funds.
- Separate: Keep it in a dedicated account to avoid the temptation of spending it on non-emergencies.
When to Use Your Emergency Fund
An emergency fund is for genuine emergencies, such as:
- Unforeseen medical expenses.
- Immediate home or car repairs.
- Temporary loss of income.
Avoid using it for discretionary expenses like vacations, gifts, or non-urgent purchases.
Replenishing Your Emergency Fund
If you dip into your emergency fund, make it a priority to replenish it. Treat it like any other financial obligation and set a timeline to restore it to its original level.
Emergency Fund: A Key to Financial Independence
Building and maintaining an emergency fund is not just about being prepared for the unexpected—it’s about fostering a sense of financial independence and peace of mind. By integrating an emergency fund into your financial and retirement planning, you ensure that life’s uncertainties don’t derail your long-term goals.
Whether you’re just starting your financial journey or planning for retirement, an emergency fund is a powerful tool that safeguards your future. Start building yours today to secure tomorrow.
This blog post is part of the Pre-Retirement Journey series.