The Covid-19 pandemic has taught us the importance of having an emergency fund to keep ourselves financially covered during tough times. The pandemic has caused many Malaysians to lose their jobs, sources of income and suffers pay cuts. With this kind of situation suddenly coming in, we are becoming more concerned when it comes to money matters.
Based on Bank Negara Malaysia’s (BNM) Capability and Inclusion Survey 2015, it was reported that 75% of Malaysians find it difficult to raise RM1,000 cash for emergency purposes. Additionally, 32% of Malaysians can only cover at most a week’s worth of expenses if they lose their source of income.
Saving up some money in a separate bank account every month can be overwhelming at first, but it can be beneficial for long-term unexpected events. Instead of applying for a loan, borrowing money, or using your credit card, your emergency fund can help you cover all of the expenses without getting into debt.
An emergency fund is a good start to make your financial plan stronger in the long run. If you’re not sure where to start, here’s a quick guide to help you with it.
What is an emergency fund?
An emergency fund is a fund that you set aside to use only in times of financial distress. It works as a safety net so you don’t have to stress out on how to survive during unforeseen circumstances, such as unemployment, having unexpected medical bills to pay, and urgent home repair or replacement.
It is made to ensure that you can still provide for yourself and your family without considering additional liabilities. Having an emergency fund will give you the comfort that you need in a situation when something unfortunate happens.
An emergency fund allows you to meet unexpected financial challenges and keeps you from getting into debt.
When should you use your emergency fund?
The best way to figure out when you should use your emergency fund is to understand what situation is consider as an emergency and what is not. Here are a few examples to help you categorize your situation:
- Job loss
- Unexpected medical bills
- Unexpected car repairs
- Unexpected house repairs
- Home appliances and decorations
- Car modification for aesthetic purposes
- Buying unnecessary gadgets
How much emergency fund is enough?
It depends on your financial health and how much money you can set aside for your emergency fund, but most financial experts agree that an emergency fund should have at least three to six months’ worth of monthly expenses. To estimate the amount, you can add up how much you spend every month on crucial or basic living expenses, such as:
- Rent or mortgage
- Car loan
- Utilities (electric, WiFi, electric, other bills)
- Health care
Now that you know the amount of your monthly expenses, you can multiply it by three to six months, and that would be your emergency fund target amount.
Here’s an example to illustrate it better:
Three months: Times your total expenses by three: RM3,100 x 3 = RM9,300
Six months: Times your total expenses by six: RM3,100 x 6 = RM18,600
You can set your emergency fund goal between RM9,300 and RM18,600.
The goal may be different for those who are married and single. Keep in mind that your emergency fund can be more than just basic living expenses; you need to consider other potential expenses that you have to commit to paying every month.
Putting away three to six months of income for your emergency fund may sound like a lot, but you can start it small; slowly but surely until you reach your goal.
Where to put your emergency fund in Malaysia?
It’s best to place your emergency fund in a separate bank account, not the same account that you use daily or where your income is transferred to. Your emergency fund needs to be easily accessible when you need it quickly, and at the same time, you don’t want it to be easily reached so you won’t be tempted to take out the fund unnecessarily.
It can be a savings account or a low-risk liquid account that earns interest. A place to avoid keeping your emergency fund is fixed deposit accounts as your fund will be locked. Below are the two best options you can consider:
1. High-yield savings accounts
High-yield savings accounts usually offer a higher annual percentage yield on deposits, which means that your money earns more interest over time. Besides that, these savings accounts may carry minimal fees compared to regular savings accounts.
Some of the high-yield savings accounts you can find in Malaysia that offer high-interest rates are UOB Stash, RHB Bonus Saver, and Maybank M2U Saver.
2. Money market savings accounts
A money market account is a savings account that has checking features. It comes with checks or a debit card that allows only a limited number of transactions each month. Like high-yield savings accounts, money market accounts also offer higher interest rates than regular savings accounts.
However, the potential downside is that money market accounts may require a high minimum deposit to open. You need to find options with a minimum deposit requirement.
How to make your emergency fund last longer?
If you’ve lost your job and have some medical expenses or other bills to pay, this is when your emergency fund comes into place. However, it’s also important to look for ways to save your emergency savings for as long as possible. Here’s what you can do:
- Cut off other unnecessary expenses (if any)
- Sell items that are no longer in use
- Apply for unemployment benefits
- Look into the government’s financial assistance programs
- Get in touch with creditors for financial relief measures
- Start a side hustle to earn extra income
It can be challenging to start saving up to six months' worth of your expenses, especially when you’ve never been a saver yourself. It’s important to do your own research before you decide where to keep your emergency fund, but be sure to save it in a place where the money can safely grow while you are not using it.
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