Jeff, an avid cyclist, goes riding almost every weekend all around Singapore and is in such great shape that he sometimes covers 100 kilometres in a single day. About two years ago, however, he literally hit a bump in the road and was injured so badly that he spent weeks in the hospital, then months recovering. Although his company helped in the initial stages, his sick leave ran out before long and Jeff had no income for months on end.
While few if any of us expect to end up in a similar situation, the reality is quite different. Research shows that more than 25 percent of Americans in their 20s will become disabled before they retire, and numbers seem likely to be similar in Singapore. Moreover, Singapore Ministry of Health (MOH) data shows that 40 percent of Singaporeans aged 20 years and above are already suffering from at least one chronic ailment.
Along with being out of work for illness or injury, an increasing number of workers are losing their jobs. 15,580 workers here were made redundant in 2015, according to Ministry of Manpower data, which was about 0.7 percent of the 2.2 million residents in the workforce. Only 54 per cent of these people found “re-entry into employment” within 6 months and only 67 percent within 12 months.
How Much Money is Enough?
Even though they might not expect anything to happen to them personally, Singaporeans do realise the need to save for an emergency or unexpected situation. Indeed, the Financial Planning Standards Board’s 2015 Singapore Survey showed that 55 percent of Singaporeans say building savings or an emergency fund is one of their top 5 financial priorities.
The Blackrock Global Investor Pulse Survey also found that Singaporeans are generally risk-averse and want to have an average of 7 months’ worth of salary in savings before they would feel comfortable enough to invest.
Experts, too, suggest keeping about 6 months’ worth of expenses available in case of an emergency. Investment management firm Vanguard, for example, says that most experts believe your emergency fund should cover at least 3 to 6 months' of living expenses. Investment advisory firm Morningstar similarly says that “most financial planners recommend setting aside six months' worth of living expenses in an emergency fund.” Morningstar suggests having enough in your emergency fund to cover all conceivable expenses, including enough for your mortgage or rent, food, transport, insurance, taxes and other necessities.
Additional factors in deciding how much to set aside vary for each individual and include how secure your job is, how marketable your skills are, and the likelihood of healthcare emergencies. Someone who has health issues or whose skills may make it harder to find a new job, for example, may want to set funds that would cover more than six months of expenses.
Having basic insurance in place to make sure you have enough money to pay your bills in case you have an accident or end up in the hospital or even end up being totally disabled is prudent as well.
Ways to Save Enough
Even though a majority of Singaporeans may say they want to put aside money for an emergency, the reality is that many people find it difficult to start saving money. Prioritising savings is often held back by short-term and mid-term financial commitments and a lack of knowledge about how to save. Experts suggest a number of practices to overcome that inertia.
To make saving easier, financial advisor Suze Orman suggests opening a savings account and calling it something like My Emergency Fund, so you feel great knowing you are building security. “It could take years to reach your goal,” Orman advised. “The important issue is that you are starting to save today.” Automatically depositing part of your salary into the account every month can make saving more regular.
Budgeting apps can also help you manage your money better and set aside something in your emergency fund every month. GoodBudget, for example, uses envelopes whereby you categorise your expenses, decide how much to spend in each category, put income or receipts into each envelope, and track expenses. Toshl goes a step further by analysing earnings as well as spending to assist with planning, and Wally allows users to scan receipts as well as to receive notifications when payments are due or when they reach a target for savings.
It can also be beneficial to set up separate funds for unexpected expenses and for emergencies. University of Minnesota Extension Educator Susan Hooper found that consumers see a difference between “set aside savings,” for periodic expenses such as replacing a broken appliance, and” emergency income savings” to pay the mortgage and utilities if income stops for a few months.
Making the Most of the Cash
Once you do start saving, putting the funds in an account that pays more than the low interest rates on savings or current accounts can be preferable. The reason, as MoneySmart noted, is that savings accounts in Singapore “tend to offer rather pathetic interest rates.” At the same time, the funds are for an emergency so it is better not to put them into a volatile investment such as share, which could drop in value just when you need the money.
A preferable option, then, may be to put the funds into lower-risk investments that are very liquid so that you can get your funds quickly. An Exchange-Traded-Fund (ETF) that invests in short-term bonds, for example, pays more and often less volatile yet is immediately accessible.
A team led by Prairie View AM University Faculty Member Janine Scott reached a similar conclusion, finding that keeping all of your emergency fund dollars in cash may not be as good as investing them. Their research showed that allocating six months of expenses to cash resulted in lower wealth at retirement than investing that money in stock and bond funds, as well as more frequent situations when the fund failed to cover emergencies.
It’s Time to Start Saving
While it may seem like a long-term illness or being made redundant is unlikely, the reality is that it could happen to any one of us. Having an emergency fund available can reduce the burden of such an event tremendously. The time to start saving is now.