You will be able to size an emergency fund from your own spending and job security.
Ask ten people how big an emergency fund should be and most of them will say six months. Ask what six months means, six months of what, and the answers start to differ. Six months of salary? Six months of what you spend now? Six months of rent? Depending on which they meant, the same person can end up with a target of S$12,000 or one of S$40,000.
This lesson gives you a way to set a figure that fits you, and a reason you can write next to it.
A common rule of thumb is to hold three to six months of essential spending. It is a sensible starting range. Three months covers most short gaps between jobs and most large one-off bills, and six months covers a longer job search or a run of bad luck.
Where you land inside that range, and whether you go beyond it, depends on how likely you are to need the money and for how long.
Base the figure on essential spending: the costs you would still have to pay in a bad month after cutting everything you could. In an emergency you would stop eating out as often, put off the holiday and skip new clothes. You would still pay rent, bills, loan repayments, insurance premiums, basic food and transport, and whatever you give to people who depend on you.
This matters because essential spending is usually well below total spending, so the fund it gives you is smaller and quicker to build. A target based on total spending can look so large that people never start.
Your cash flow statement from lesson 1.4 makes this quick. Your fixed costs are almost all essential. From your variable costs, keep the part that covers food, transport and the basics, and drop the rest.
Here is an example with made-up figures. Darren pays S$900 rent, S$500 to his parents, S$250 on his study loan, S$150 in insurance premiums and S$30 for his phone. His fixed costs add up to S$1,830. He estimates that basic food and transport would cost him S$800 a month if he cut back. His essential spending is S$1,830 plus S$800, which is S$2,630 a month.
Now choose the number of months. Lean towards the higher end of the range, or past it, if any of these apply to you:
Your income is variable, such as commission, freelance work or a business of your own. Your industry is cyclical and tends to cut jobs in a downturn. You are the only earner in your household. Other people depend on you, such as children or parents you support. Your job is specialised enough that the next one might take a long time to find.
Lean towards the lower end if your income is steady and in demand, you share costs with a partner who also earns, and nobody depends on you. Thin hospital cover pushes the figure up too, since a medical bill would take a bigger bite out of the fund, and that is one more reason module 4 follows this one.
Write the reason down. "Five months, because my parents rely on me" is a decision you can revisit. "Five months" on its own is a number you will forget the reason for.
Darren is single and salaried, in an industry that has been stable, but his parents rely on the S$500 he gives them each month, so he picks five months. His target is S$2,630 x 5, which is S$13,150.
Aisha is 34 and works as a freelance designer, with figures again made up for the example. Her income swings from month to month, and a slow quarter is normal in her trade. Her essential spending is S$3,200 a month. She goes beyond the usual range and chooses eight months, because her income can drop with no notice period and no retrenchment payment. Her target is S$3,200 x 8, which is S$25,600.
Both figures are right for the people who chose them. Swap them over and each would be wrong.
When you are starting from close to zero, a target of S$13,150 or S$25,600 can feel too far away to bother with, and splitting it into steps helps.
The first step is one month of essential spending, which is S$2,630 for Darren. That covers a large repair, a medical bill or a short gap between jobs, and you will reach it far sooner than the full target. Reaching it also proves to yourself that the setup works.
The second step is the full target. Some people add a middle step at three months. Each step gives you a visible point to celebrate and a reason to keep going, and if something happens before you reach the full target, a partly built fund is still far better than none.
Lesson 3.4 turns your target into a monthly transfer and a completion date. Before that, you need the target itself. Open your cash flow statement, and keep in mind the reason you will write beside your number of months.
Calculate your essential monthly spending, choose a number of months with a reason, and write your emergency fund target.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).