Just started working and budgeting your finances? It is time for the next step.
But before you get into the more exciting aspects of personal finance, such as investing, you will first need to save for an emergency fund. It can seem boring – or even unnecessary – to save money for “just in case” events, but having an emergency fund is an important step in your personal finance journey.
Here is why an emergency fund is so important, and how you can start building one.
What is an emergency fund?
An emergency fund refers to savings that you set aside to cover unexpected expenses. The Employees Provident Fund (EPF) suggests keeping an emergency fund that is at least six months of your salary. If you have other financial responsibilities, or if you have uncertain income, you could consider saving more. For example, freelancers who periodically go through dry spells of work or parents with several children may need bigger emergency funds.
Why is it important?
1. It can cover emergencies
A broken-down car, burst kitchen pipes or a surprise trip to the dentist... These events cost money. If you do not have any savings set aside, it can be hard to scrape together thousands of ringgit immediately. Having an emergency fund helps you cover these costs.
2. It gives you flexibility
Saving money might sound restrictive, but an emergency fund can actually give you more financial freedom. It allows you to make decisions without worrying about being limited by your finances. For example, you could take a month of unpaid leave to care for a family member who has fallen ill. If you have been retrenched, you can spend a longer time scouting for a new job, instead of taking the first one that is offered to you. These choices are possible because you have enough emergency savings to tide you over until you get back on your feet
3. You can avoid taking on debt
If a sudden expense arises - and you do not have enough money to cover it - you may have to turn to credit cards or personal loans. While they can be helpful in a financial pinch, you may incur high interest charges if you do not repay them on time.
4. You do not have to rely on others
If you have just started working, perhaps your first instinct when you run into financial trouble is to ask for help from your parents. But not everyone has family who can afford to bail them out in difficult financial situations - and even if you did, you might not want to burden them. With an emergency fund, you can rely on your own savings to cover these tight spots without relying on help from others.
5. You do not have to dip into your investments
Having some savings before you start investing is important. Otherwise, if you run into an emergency, you may be tempted to dip into your investments to cover the costs. This could force you to sell your investments at loss. Besides that, it could mean incurring more transaction costs, as you will be buying and selling your investments more often. Certain investments may take some time to sell too.
How do you start saving for one?
Trying to save money to cover three to six months of living expenses can be daunting. If you spend RM2,000 on living expenses monthly, that means you need to try and save between RM6,000 and RM12,000! The trick is to work at it gradually.
Set aside a portion of your income every month, and channel that towards your fund. Periodically inspect your budget to see if you can increase your savings. You will get there eventually.
In the event of an emergency, you need to be able to access your money immediately. Keeping it in a savings account allows you to do that. You could also use the MAE app’s Tabung feature to set up a rainy day fund and track your savings progress.
Besides that, you could also keep your emergency fund in a fixed deposit, which you can open online with Maybank. With fixed deposits, you might incur an interest penalty if you withdraw your money before the tenure ends. Some people get around this by keeping their money in multiple fixed deposit tenures.
What is next?
Most Malaysians would have trouble covering three months’ worth of expenses if they lose their income, so having an emergency fund is a great achievement. But it is just the first step of your personal finance journey.
After you set up your emergency fund, the next step is to save and invest for other financial goals. This will require a different approach. Instead of just channelling your money into a savings account or fixed deposit for emergencies, you may need to invest it in assets that can generate higher returns. Here is where the Maybank Financial Goal Simulator comes in. Whether you want to buy a house or retire early, it helps you estimate how much money you might need to put aside every month to achieve your goal. You can also adjust your savings goal and timeframe to simulate different scenarios and outcomes. With the Financial Goal Simulator, planning your personal finance journey is a breeze.