You will be able to decide ahead of time what counts as an emergency and how you will rebuild the fund after you use it.
An emergency fund usually fails in one of two ways. In the first, it gets treated as a general savings pot. Flights, a new gadget and a friend's wedding in Bali each take a little, and the balance slowly drains into things that were never emergencies. In the second, the fund is guarded so fiercely that when a real emergency comes, the bill goes on a credit card because touching the fund feels like failing.
Both problems have the same cure. Decide in advance what the fund is for and what you will do after you use it, and write both down.
An emergency is a cost that passes three tests: it is unexpected, necessary and urgent. Unexpected means you did not know it was coming. Necessary means you cannot reasonably go without paying it. Urgent means it cannot wait until you have saved for it in the normal way.
Losing your job passes all three. So does a hospital bill your insurance does not fully cover, an urgent repair such as a broken water heater or a leaking pipe in your flat, or a flight home because a parent is seriously ill.
Some cases depend on the details. A broken laptop passes if you need it for work tomorrow, because then it is necessary and urgent. It fails if it is a second laptop you use mostly for streaming, because that can wait. A sale on a phone you have wanted for months fails the first test, and usually the second as well. A friend's destination wedding fails, however much you want to go.
When you are unsure, ask yourself three questions. Did I know this was coming? Do I really have to pay it? Can it wait a month or two while I save for it? If the cost passes all three tests, pay it from the fund. If it is a known cost, it belongs in your spending plan.
Many costs feel like emergencies but are only expensive and predictable: annual insurance premiums, yearly road tax, festival spending, a holiday booked six months out, a child's school fees. You often know to the month when these are coming. They belong in the irregular costs line of your spending plan, which you set up in lesson 2.2, "Set a spending plan from your real numbers".
If predictable costs keep landing on the emergency fund, the fund never stays full and will not be there when something unexpected happens. If you keep dipping into the fund, your spending plan is missing a line. It does not mean you are bad at saving. To fix it, add the missing line to the spending plan, put money into it every month, and leave the emergency fund for emergencies only.
When something passes the three tests, use the fund, because that is what you built it for. The alternatives are all worse:
putting a medical bill on a credit card you cannot clear in full, which means paying card interest, usually far higher than anything the fund earns in a bank account selling investments in a hurry, which can mean selling at a low price, as lesson 1.2 showed borrowing from family, which can strain relationships for years
A fund that pays a S$3,000 bill (an example figure) without a loan, a card balance or a forced sale has done exactly what it was set up to do. Using it means the plan is working. The only failure is having a fund and not using it.
A simple refill rule works for most people. After using the fund, pause your other saving goals and send the surplus that was going to them into the emergency fund until it is back at target. Then restart the other goals. The fund comes first because it protects every other goal. While it is short, the next emergency would land on your investments or your credit card.
Take Mei, who is 30. Her emergency fund is at its target of S$15,000. She invests S$600 a month and saves S$300 a month for a holiday. Then she is admitted to hospital, and after insurance pays, her share of the bill is S$3,600. She pays it from the fund, which drops to S$15,000 - S$3,600 = S$11,400.
Following her rule, she pauses the S$600 investing and the S$300 holiday saving and sends S$600 + S$300 = S$900 a month to the fund. S$3,600 / S$900 = 4, so after four months the fund is back at S$15,000. In the fifth month she restarts investing and holiday saving at their old amounts.
The rule costs Mei some time on her other goals. Her holiday is four months later, and she starts investing four months later than planned. In return, her fund is full again before she goes back to investing, so a second bad event that year would not hit her portfolio.
If your other goals take only a small share of your surplus, the refill will take longer. In that case you can also send part of your day-to-day budget to the fund for a few months. Write this into your rule in advance, including how many months, so you have already decided it before you need it.
Write your rules while you are calm, before the next emergency. List the specific things in your own life that would pass the three tests. Then list the ones that would not. Finally, write down the refill rule you will follow, including whether you would also use part of your day-to-day budget, and for how long.
Write down three things that count as an emergency for you, three that do not, and the rule you will follow to refill the fund.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).