When you’re living your ‘best life’ spending everything you earn (or more), it doesn’t take much for the wheels to come off. An unexpected tax bill, medical emergency, car breakdown or job loss can send your financial life into a tailspin. An emergency fund is there to help mitigate the impact of these small (or large!) bumps in the road so you can continue your journey to FI.

What is an emergency fund?

An emergency fund is there to help with those emergencies that spring up from time to time. We are talking things like medical bills and a new heating system for your home in winter. It is NOT there for that cheeky weekend break, birthday treat or new handbag. Its money that gives you peace of mind that everything will be (financially) ok, when things are not ok. I’ve experienced the power of the emergency fund in action recently. I was hit with a trifecta of expensive bills which popped up unexpectedly (read about it here).

Your emergency fund has an additional physiological impact of being some ‘f*@k you’ money. Working a job you hate, with nothing to fall back on if you quit right now is soul destroying (I know how it feels, i’ve been there!). Work feels like prison, with no escape. This is amplified even more if you have people relying on you financially. When you’re in that mindset, you’re making decisions because you have too, not because it’s the right choice.

So having an emergency fund set up, no matter how (initially) small is a lifeline you can’t afford to skip.

How much should be in it?

The answer to this question is very subjective. Your emergency fund should be as much as you think you need to give you peace of mind. To know that if you get laid off today, or quit on the spot, you will be (financially) secure for the time needed to get back on your feet.

Remember though, it is possible to have an emergency fund which is too big! If it’s too high, you are wasting the opportunity to earn better returns by utilising that money in your brokerage account, too low and it defeats the purpose of having it at all.

How much should be in your emergency fund also depends on one additional important factor, consumer debt:

1. If you still have consumer debt: it’s prudent to set aside a small emergency fund somewhere in the region of £1,000. This amount won’t be much use if you lose your job, but will help for those smaller bumps in the road. It’s arguably more important to pay down your high interest consumer debt before building a sizeable emergency fund.
2. If you have no consumer debt: Once you have no consumer debt (woohoo!) a nice goal to aim for is to grow your emergency fund to cover 3 – 6 months of your critical expenditure. Some people may want a bigger pot for their ‘f*@k you’ stash. However as a general rule, its best not to have more than 12 months in your fund when you still are on the road to FI.

Where should the money ‘live’

Your emergency fund should be fairly easily accessible but should also still be working for you. Traditionally, people would use a high interest savings account however these are now hard to come by.

If you still have consumer debt and your emergency fund is precious, a safe and secure interest bearing account would be most prudent. If you are building your 3 – 6 month reserves, then you can be a little more flexible depending on your risk appetite. Other options include using products like Stashaway Simple or other robo investor products – note these are both Singapore specific.

In my opinion, the emergency fund should not be stored in higher risk assets like cryptocurrency and individual shares.

The MMG’s set up?

My setup is as follows:

• Six month emergency fund invested via DBS’s Digibank “Fast & Furious” DigiPortfolio based in Singapore. The funds are available to withdraw within about 72-hours notice and i’m comfortable with the risk level involved (this has yielded a whopping 19% return in 2020); PLUS
• One month of expenses buffer in a standard current account (earning very little interest!).

What is right for me may not be right for you. Think about your risk level tolerance and how much you would be comfortable having locked away in a lower yielding account. Consider using products by Stashaway Simple and Endowus Cash Smart which mimic a high interest savings account.

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