Article

How much should you put in your emergency fund?

17 April 2023

4-minute read

Plan Well Feature Save and invest

An emergency fund is essential for mental and financial wellbeing. (Credit: Shutterstock)

The pandemic has taught the world the importance of planning and managing one's finances to build a secure future. Many people have learned that an emergency fund is necessary to cover unforeseen expenses or financial emergencies.

According to a survey by the Organization for Economic Cooperation and Development (OECD), Hong Kong's high savings rate provides people there with an added layer of financial stability. Among the five Asian countries surveyed, only Hong Kong's respondents (55 per cent) say they could weather a loss of their main income without borrowing money for six months or more.

Such preparedness builds financial resilience. As the OECD points out, being prepared means you can quickly recover when things improve. Moreover, you can cope with hardship better if you save for the unplanned or unexpected.

How much to have in an emergency fund

Use your essential monthly expenses as the basis of the amount your emergency fund needs. (Credit: Shutterstock)

If you lose your job, it may take up to six months to find a new one. During that time, you have to rely on your savings to pay for your basic needs. That's why financial experts say you need three to six months' worth of living expenses for your emergency fund. This can support you in a financial crisis without having to rely on costly credit cards or personal loans.

Determine the amount of your living expenses by tracking your expenses for at least three months. Then, calculate how much you need for monthly essentials, from food and shelter to communications and transportation. Personal finance advisor Ramit Sethi, author of I Will Teach You to be Rich, even recommends 12 months' worth of living expenses if you want a buffer against rising inflation rates.

Remember, a financial emergency can be something other than a job loss or hospitalisation. It could include unexpected and expensive repairs to your car, refrigerator or laptop

Saving three or six months' worth of living expenses can take time and financial discipline. Set yourself up for success by targeting a savings goal and a date to accomplish it. The key is to save consistently, even if it's a small amount.

Where to keep your emergency fund

Build an emergency fund with cash and insurance for financial resilience. (Credit: Shutterstock)

You never know when you'll need your emergency fund, so it is prudent to have it accessible anytime.

The safe-yet-accessible option for emergency cash is in a bank, preferably a high-yield savings account that typically offers higher interest rates than traditional ones. This way, you can earn a good return on your money. Remember to clarify with your bank if you need to maintain a certain balance to qualify for a higher rate. You also want to avoid a savings account that charges a fee when you withdraw.

You may want to set up an automatic transfer from your salary account to the savings account to ensure you don't miss a contribution to your emergency fund. Also, keep your emergency funds separate from the accounts used to pay bills to avoid accidentally spending the money on non-emergency expenses.

You can also consider life insurance if you want to boost your cash reserve, but you don't need instant access. Some plans now accumulate cash value and come with guaranteed annual cash payouts equal to a set percentage of your premium. For example, AIA has an insurance plan that can give you this benefit as soon as your policy's first anniversary arrives. It's additional financial security for you and your loved ones.

Financially ready for the unexpected

Unpredictable or unexpected spending may lead you to make unwise decisions, further putting you in an undesirable financial situation. An emergency cash fund can help prevent going into debt or depleting other savings. In addition, it reduces your stress and provides a breathing space until you can regroup.

The important thing about building an emergency fund is to start saving whenever possible. It's okay to start small until you can set aside money consistently. You may have to refocus your financial goals and redo your monthly budget, which will challenge your patience. Stay motivated by reminding yourself the payoff is peace of mind. Plus, there is nothing wrong with rewarding yourself when you've reached your savings target.

Equip yourself with the financial skills to achieve the future you want. Finance expert Lachlan Campbell shares his advice on planning for life's significant moments in this episode of AIA Voices.

AIA Voices is a community of influential and educational voices from around Asia to talk about life, health and wellness. A platform to educate, motivate and inspire people to make positive behavioural changes on their health and wellness journey. Providing an opportunity for communities across Asia to connect, collaborate, and learn from each other. Designed to drive AIA One Billion, our ambition to engage a billion people to live Healthier, Longer, Better Lives by 2030.

References:

OECD. 2021. Financial consumer protection and financial literacy in Asia in response to COVID-19. [online] [Accessed on 9 September 2022]

Consumer Financial Protection Bureau. An essential guide to building an emergency fund. [online] [Accessed on 9 September 2022]

Disclaimer:

This is general information only and is not intended as financial, medical, health, nutritional or other advice. You should obtain professional advice from a financial adviser, or medical or health practitioner in relation to your own personal circumstances.