Starting your emergency fund

November 19, 2013

Emergency funds are usually separate from general savings for holidays and other life events. You wouldn’t want to pay for that car tire whilst foregoing your Bali vacation.

 

By Diana ChaiThere will definitely come a time when life will just happen. Living paycheque to paycheque will surely lead to difficulty when a sudden car repair, hospital bill or purchase comes up. For such instances, having a savings beyond that for retirement and vacations will be helpful.

Why you need one
As the name states, the fund is for an emergency! And having one will definitely save you money and a lot of stress. Many people are ill prepared for life’s little hiccups and when something does happen – they turn to credit cards and personal loans. The added debt at best will cost them exorbitant interest but at worst – may spiral into a debt cycle they are unable to escape.

Emergency funds are usually separate from general savings for holidays and other life events. You wouldn’t want to pay for that car tire whilst foregoing your Bali vacation.

The Basics
To get you started on building your emergency fund; these are some basic rules.

Start by saving 10% of your income. Granted, 10% is harder for someone on a salary of RM1500 than for someone on RM3000 but endeavour to hit the 10% mark anyway. But honestly, the key is to save something. If you can’t meet 10%, go for RM100 a month.

If 10% from the get-go on salary day is too scary a number; spread the amount over the month. For instance; if you earn RM3000; 10% is RM300. Divided over a month, it’s RM10 a day. So, start by saving RM10 a day, every day. The staggered payments make it easier to swallow and you will still end up with the same amount at the end of the month.

Put it in a savings account and not in a safe at home or under the bed. Most savings accounts will give a minimum 2% interest on your savings. This is better than having your fund grow nothing else but mould.

Don’t apply for an ATM card. ATM cards will only help you give in to the urge to withdraw the money. Save the RM8 fee and don’t get an ATM card.

Optimise Savings
Once you have at least RM1000 in your emergency fund; it’s time to get more serious about saving.
Start shopping around for savings accounts with better interest rates. The fund is still for emergencies and at the time you’ll want easier withdrawal so avoid fixed deposit accounts. Savings accounts have limited interest rates but with some digging you may find one giving perhaps an extra 0.5%. It may not seem like much but when your pot grows; it can make a nice difference.

Revise saving levels with every increment. As your salary increases: look to increasing the percentage you save. Saving at an income of RM5000 is easier than on RM3500 so look to increasing to perhaps 15% or even 20% if you can manage it. If you don’t like percentages, increase it by RM50 or RM100 when you can.

Automate savings. Though you can start this at the get-go; it’s sometimes helpful for some to start slowly. The daily method will not work on automation. But once you are comfortable with saving – start an auto-deduct plan with your bank to funnel your savings straight into your savings account. Of course, you can always start with automated savings to help ensure you don’t slack off from the beginning.

Unlike general savings; your emergency pot doesn’t need to always grow. Keep it at RM3000 or RM5000. You’ll only need to restart saving if you’ve used the money. It’s important to remember that an emergency fund is just for emergencies and should not take the place of regular savings.
This article brought to you by Diana Chai of RinggitPlus.com. We believe all Malaysians should have access to free, accurate and independent personal finance information.