How much emergency savings should you have?

Disclaimer: Please note that all content and information in this blog are for educational and informational purposes only and should not be taken as professional investment advice.

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In general, having readily accessible emergency savings of at least 6-12 months of your monthly expenditure should be the minimum level of emergency savings you should have.

However, I believe that we should not base our emergency savings on our expenditure, but on our income. Due to inflation, our expenditure for the next 6-12 months will be higher than our expenditure for the past 6-12 months. As such, basing your minimum level of emergency funds on income instead of expenditure will allow you to better gauge the level of emergency savings you need.

However, if your expenditure is higher than your income (which should not be the case), then basing your minimum level of emergency savings on your expenditure is definitely a better gauge of your minimum amount of emergency savings required.

In general, if your risk appetite is higher, holding the minimum of 6-12 months of emergency savings is fine. However, if you are generally more risk averse, I will recommend holding at least 12-24 months or more of emergency savings to help you tide through rainy days. 

Generally, the younger you are, the less savings you are likely to have. As such, if you are younger and are currently working, aim to save and build up at least 6-12 months of emergency savings as soon as you can.

Once you have built up your emergency savings to a level you are comfortable with, you can invest your excess funds in stocks or ETFs, which generally provide a higher level of return in the long term compared to high interest rate saving accounts or short term cash investments. 

Investing in good quality stocks and ETFs will provide you with a steady flow of passive income in the form of dividends or capital gains (when you sell the stock), which you can use to tap on during an emergency or retirement.

Beyond your basic emergency savings, aim to build up your investment portfolio with the excess savings you have instead of leaving them in short term cash investments, which will not allow your funds to compound and grow as much as the stock market.

Oftentimes, having an alternative source of funds (e.g. from your investment portfolio and/or passive income) to tap on apart from your emergency savings will allow you to tide through beyond what your emergency savings provide. Your emergency savings may be able to fund your expenses for the next 6-12 months, but once they are exhausted, you will have to look for other sources of income, which can be difficult especially during a crisis or emergency.

Therefore, having investments beyond your emergency savings (be it in stocks, ETFs or bonds) will provide you an additional layer of funds to tap on in the event of an emergency. 

Ultimately, you should aim to achieve a portfolio that is able to meet or exceed your monthly expenses, be it through dividend income or an annual withdrawal from the capital gains of your investments.

As you age, it may be wise to aim to accumulate a higher level of emergency savings. Oftentimes, health complications in old age may prevent us from continue working as long as we desire to. With your working income suddenly cut off or with a costly medical bill to pay, having sufficient emergency savings will enable you to go through sudden and unexpected emergencies with greater peace of mind, which I believe is especially crucial during times of crisis.

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Also, it is important to ensure that your emergency savings are: 

a. Accessible

You should make your emergency savings as accessible or as liquid as possible, be it having some physical cash at home or leaving it in your readily accessible savings account.

Ensuring that you are able to withdraw your savings without delay during times of emergency will enable you to make use of your emergency savings to meet your needs without having to borrow money from others.

b. Growing

Because of inflation, the cost of living and hence our monthly expenditures will always go up. As such, it is important to ensure that our emergency savings funds are growing, and not shrinking. As long as we are able to make our emergency savings grow equal or faster than inflation (about 2-3% a year on average), we will be able to draw on our emergency savings to meet our monthly expenditures in the event of a crisis.

c. Diversified

It is important to ensure that your emergency savings are not concentrated in one specific type of cash investment (e.g. savings account, FDs, SSBs or T-bills). Each type of cash investment has its own set of pros and cons.

Saving Accounts vs. Fixed Deposits, SSBs and T-bills

Generally, physical cash and savings accounts are the most liquid. However, they tend to provide the least amount of growth. Physical cash pays no interest, while most savings accounts usually pay 0.05% p.a., which is extremely low especially in a high interest environment like now. Instead of keeping all of your emergency savings in physical cash or a regular savings account, look for other types of cash investments which allow you to grow your emergency savings at a better rate.

For example, SSB pays about 3% p.a., and pays accrued interest, meaning if you withdraw your funds before maturity, you will still be paid interest on a pro-rated basis up till the date of your withdrawal. SSB funds are generally less liquid as they will only be deposited back into your bank account on the first working day of the following month.

As such, it is wise to not allocate all of your emergency savings into SSB, but only a portion which you will not require for at least the next one month. For example, if you have a monthly income of $5k, and emergency savings of $60k, you can keep about $10k in physical cash and/or savings account, $20k to SSB, and the remaining $30k to T-bills.

Also, apart from SSB, T-bills and FDs are also good alternatives. However, T-bills are less liquid and could risk a small capital loss as they have to be sold on the secondary market if redeemed before maturity. For FDs, most banks usually allow early redemption with a small penalty (usually forfeiting the interest earned), but are generally more liquid than T-bills and SSB.

In short, as most T-bills are 6 months long, they are good for holding emergency savings beyond what you will require for the next 6 months, while FDs are a good alternative for T-bills if you require the funds to be more liquid and do not wish to go through the hassle of selling the T-bills on the secondary market physically at a bank.

My view:

Personally, I believe the best place to park the bulk of your emergency savings are high interest rate savings accounts. For example, UOB One savings account pays up to 5% effective interest each month if you credit your salary (above $3k) and spend at least $500 a month on your UOB One credit card. If you are able to meet these two criteria, UOB One is an ideal place to park your emergency savings. However, do note that the bonus interest of 5% is capped at the first $100k. If your emergency savings exceed $100k, you may want to consider putting the rest in SSB, T-bills or FDs. Substitutes for UOB One include OCBC 360 Account, DBS Multiplier Account and Standard Chartered e$aver Account.

Alternatively, you may want to consider other saving accounts such as digital banks like GXS or Trust Bank. Recently, GXS allowed customers to deposit up to $75k and earn up to 2.68% p.a. on their deposits. While Trust Bank pays between 1.50% to 2.50% p.a. on your deposits. Both are good options to park your emergency savings as they provide the same level of liquidity as savings account, whilst paying a decently high interest rate, without having to credit your monthly salary or spend a high minimum amount each month.

Conclusion:

In conclusion, it is important to ensure that you have sufficient emergency savings readily available to meet your immediate needs and future monthly expenditure, especially during crisis or emergencies. Ensuring that your emergency savings are accessible, growing and diversified will allow you to make full and good use of the cash savings you have accumulated, especially during a rainy day.

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Disclaimer:

The content and information provided on this blog is solely for educational and informational purposes, and should not be construed as financial advice. The accuracy or completeness of the content and information provided in the blog cannot be guaranteed. Before making any investment decisions, it is important for readers to research and carry out independent verification of the information provided, or consult with a qualified financial professional. No warranty and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of actions taken based on the ideas or information found in this blog.

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