The need for an Emergency Fund?

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So, the last few weeks I saw and discussed with many others about the need for an emergency fund, the purpose of an emergency fund and the reason for an emergency fund. I can’t say more that I am a pro-believer of an emergency fund. Yes, the naysayers are out there thinking about the every single penny that is without a higher interest cost. After all, everyone is programmed differently and we react differently in the response of what we termed as a “decision”.

With the Covid-19 situation, I do not think that the previous requirements apply now. Taking reference in the medium Singaporean salary on MOM stats in 2019 (~SGD 4,563), a really safe bet is no longer the 6 – 9 months of emergency funds but 12 – 18 months of safety net. Each and every individual is different, as humans we also adapt to situations quite adequately.

How much one’s emergency fund really depends, a fresh graduate (For example who make three grand a month) may not have much disposable income after netting off parents’ allowances, school loan if any and daily expenses. A typical planner would say probably three to six months worth of cash fund to tide through any sudden surge in expenses. I’ll say that is rather quite a decent sum to begin with. How then should the emergency funds look like for someone who is in his 30s, 40s and 50s? A $9k emergency fund ten years down the road does not reflect an emergency fund 20 years down the road. People change, society change, lives change and money value changes certainly. I can’t speak for everyone but I do see that almost everyone’s spending pattern increases when they get a promotion, get married, buying a house, buying a car, having children, family members becomes sick, friends who are retrenched, friends who fall into financial debt and many more. We are not the person we were at ten years old so neither will we be at twenty years old.

Against others who says there isn’t a need for such funds, perhaps the only uncertain thing in life is to know that no one ever knows what or when something is going to hit us hard and fast until probably we have to come facing it on our own. It is probably then too late to realise so. If there isn’t a need or purpose to think of that in such a manner, at least think of it as paying/investing in yourself first before other things. Away with the thoughts of “Spend first save the rest or Save first and spend the rest” There isn’t really a one size fit all theory. Afterall, how many of us are blessed to have people taking care of our education, exposures, overseas trips, trend and fashion purchases when we were still young and not understand the meaning behind financial planning.

To pay/invest in yourself, perhaps there is that profession certificate that you are aiming for or even to build those first $100K before age 30 or 25. Even before you dwell into that, put that emergency funds aside because there will be a time where there will be a use for it and it could prove to be extremely useful when the time comes. We have seen this in the most recent budget release where our country’s reserves are being utilised to tide through this unprecedented period of distress.

So, I hear folks who tells me bonds, equities, funds are liquid and they can easily get funds out when they need them. I’ll probably say no because emergency funds are defined as emergency funds and you got to understand the reason why it is called that. It should be as liquid as cash on hand, cash in bank and at most in Fixed Deposits that can be pre-terminated early.

Bond price, equity prices, fund prices will rise and fall. In times of recession, the true sellers outweighs all buyers and it is a false sense of security on the understanding of liquidity. In times where there is immediate use of the cash on hand. Emergency funds gives that comfort and security in doing so and I find there there is no better way at this moment unless there are disruptions that change the way we may be able to do these.

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