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December 18, 2024
A Beginner’s Guide: How to Create an Emergency Fund
Learn how to build an emergency fund to safeguard against unexpected expenses. Start small, set clear goals, avoid common mistakes, and develop healthy financial habits today.
Are you a young adult who’s finding it difficult to save, let alone have an emergency fund? Well, you’re not alone. According to a recent financial health survey conducted by Etiqa among Gen Zs, the biggest financial concern for 64% of young adults in Malaysia is their lack of sufficient savings for emergencies and other financial goals. While 95% have made changes to their spending habits to adjust to current economic conditions and continuously high global inflation rates, 33% of Gen Zs are finding it more difficult to save, and 28% are choosing to invest and save less. But it is in times like these that having an emergency fund is more important than ever, and with a new year about to begin, there’s no better time to put some healthy financial habits into practice.
What is an emergency fund? Why is it important? And why do I need one?
An emergency fund is a dedicated fund you’ve put aside for when you really need it – and not just for a rainy day either. Instead, it’s for those days when you find yourself stuck in a torrential downpour – there’s thunder, lightning, it just won’t stop raining, and your car is stuck under four feet of flood water – literally and figuratively speaking.
An emergency fund helps provide you with significant (but temporary) financial respite while protecting your current savings and finances. It also ensures you will be okay if you find yourself in a difficult financial situation or an emergency, including:
Suddenly losing your job
A medical or dental emergency, especially if you don’t have protection coverage
Unplanned home repairs
Your car really does end up in a flood
There’s a global lockdown, again
If there’s anything these challenging few years of a global pandemic, extreme weather patterns, massive job lay-offs, volatile economies and more has taught us, it’s that anything can happen suddenly and unexpectedly. Having an emergency fund truly helps us stay afloat when things get really rough.
Building an emergency fund: how to start & keep it going
Putting together an emergency fund is not a difficult task, but it’s a good idea to set some ground rules to help make it work:
Set a specific target
Financial experts recommend having three to six months’ worth of living expenses in your emergency fund. If you’re just getting started, aim for three months. Your living expenses should cover your essential monthly expenses, such as rent, mortgages, loans, bills, and your basic necessities including groceries and food.
Once you reach your goal, treat yourself! And we don’t mean using your emergency fund to buy something you’ve always wanted. Instead, use the money you typically allocate towards your emergency fund to get yourself a little something.
Done? Now it’s time to increase your target. Bonus tip: now that you’ve saved three months’ worth of living expenses, target to increase it to four, then five, then six months, giving yourself a little treat in between!
Set up a dedicated account
Keeping your emergency funds in your regular savings account will make it more tempting and easier to spend, especially when you watch the amount accumulate. Instead, open a bank account that you can conveniently ‘forget’ about. Choose one with low or zero fees, and with good interest returns, so that even when you reach your goal, your emergency fund can continue to grow. Important! If your emergency fund account comes with an ATM card, avoid keeping it in your bag or wallet. Stash it in a safe or difficult to reach part of your closet.
Also remember to keep your emergency fund as accessible and liquid as possible so you can have immediate access to it. However, avoid keeping the majority of your funds in cash to minimise losing it in a theft or an actual flood – which is when you’re going to need it the most! A few hundred Ringgit Malaysia tucked in a hollowed-out book is usually sufficient – just don’t forget the title!
Start small and go from there
Rome wasn’t built in a day, so avoid putting that kind of pressure on your emergency fund. Even if all you can afford right now is RM10 a week – do it! You can also try:
- Putting aside any small change you receive towards your emergency fund. RM1s, 5s and 10s accumulate quite quickly.
- If you hardly use cash nowadays, some bank accounts and credit cards provide the option of rounding up your expenses and will transfer that extra amount to a dedicated ‘stash’. If your accounts don’t, you can also do this manually. It takes a little more effort, but it’ll be worth it.
- Plan to put aside a percentage of any cash bonuses or miscellaneous cash you receive, including tax refunds and angpaus!
- Opt for the cheaper option – get your coffee from a small local cafe instead of an overpriced international chain – or make it yourself. Channel those savings towards your fund.
Automatic transfers
If you’re lucky enough to have a fixed, consistent income and spare funds after your monthly expenses, set up an automatic transfer. This way you won’t have to remind yourself to transfer the amount over to your emergency fund every month, and it’ll get transferred before you even have time to think about spending it!
Common emergency fund mistakes to avoid
Yes, it is possible to make mistakes when you’re trying to set up an emergency fund. Here’s a few common ones to keep in mind:
Not enough funds
Your needs and monthly expenses will change over time. How much you need as a single young adult will be very different when you’re married with a child or more. Check in annually to make sure your emergency fund balance meets your current needs. If it doesn’t, it’s time to start adding to it once again.
Investing in high-risk assets
While high-risk assets (like cryptocurrency, for example) can give you quick returns, it can also crash unexpectedly. Avoid placing your emergency funds in volatile investments. Go for low-risk, accessible assets like savings accounts or unit trusts such as ASB. While property is a great investment, it’s not liquid enough if you need cash in a hurry. You can also consider precious metals or jewelry like gold or diamonds, especially if you’re terrible at keeping cash. Just don’t forget to keep them somewhere safe and secure!
Not diversifying your emergency fund
Relying solely on a savings account for your emergency fund limits your options. You can also use insurance or takaful to protect your finances and as a form of future financial planning. Additionally, having insurance or takaful means you won’t have to touch your emergency fund in the event of sickness, accidents, hospitalisation, and other covered incidents. Check out etiqa.com.my for information about our protection products.
Using your entire emergency fund when you don’t need to
You don’t have to spend it all! If you have RM15,000 in your emergency fund and need RM1,000 to repair your cracked mobile phone screen, do not spend the balance to get a new phone, ok?
Forgetting to replenish your emergency fund after use
Whether you use a little or a lot, always replenish your emergency fund after using it. You don’t have to replenish it all in one go – unless you can afford it – so set your new target and take it from there.
Now that you’re starting to save for an emergency fund it’s important to remember to use it only in an actual emergency. Buying a gadget on sale or taking a last-minute trip doesn’t count, no matter how good the savings. And whether you’re a Gen Z, Millennial, Gen X-er and, yes, even a Boomer, it’s always a good idea to have an emergency fund, and you don’t have to wait until a new year rolls around to start one either.
Start small today, even if it’s just with RM1 or RM10. Once the ball starts rolling, it will be much easier to keep things going, and it will become a good financial habit once you get used to it. You can always increase your emergency fund contributions later when you have the extra cash. So, don’t wait, let’s build that emergency fund!
