What is an emergency fund and is it flawed?
The concept of an emergency fund may have originated from the US.
It is money set aside for for expenses from emergency hospital treatment or an unexpected loss of income.
Back here in Singapore, the conventional suggestion is also for everyone to create an emergency fund. Many have written about it such as this post by moneysmart.
In my experience in financial planning, I've realised this concept of an emergency fund has little practical use.
If you are already saving well, emergency fund creates a mindset of scarcity. In certain situations, it causes you to be overly conservative in how much cash to hold.
If you are NOT saving well, then implementing an emergency fund is a mere concept when you are living month to month. The root causes of your problems are MUCH deeper.
Reason 1 why emergency fund is not needed:
There may not be a need to fund hospital treatment with cash
If you have an integrated shield plan on hand, be familiar with the letter of guarantee (LOG) process.
These LOG can save you on cash needed as deposits to hospitals.
An example is the AIA shield pre-authorization which you can click here for more details.
I have personal experience on an emergency hospital treatment.
My dad had a stroke some 14years back. Back then, there was no concept of letter of guarantee LOG but because he was in a subsidised ward, all bills were paid by medisave.
Recalling that experience, I believe that even if cash that we don't have was needed, we would have pooled an amount from credit cards and external family contributions.
When I look back at that emergency hospital treatment, I remember only the psychological trauma to my family and not the cashflow issues.
Reason 2 why emergency fund is not needed: It does not help having 6months expenses in cash in an event of a layoff
In Singapore, the government sector hardly does any layoffs to start with. I don't know if you would agree.
But not so in the private sector.
I'd 3 friends who were laid off before age of 40. One was from IT and 2 were from banking.
At each of these events, there was a severance compensation.
With a severance, it may NOT be true that an emergency cash is needed to cover for loss of job.
There is even this blogger financialsamurai who teaches on how to engineer a layoff and get a compensation!
If layoffs happens to you, it is more crucial factor to quickly adjust your lifestyle downwards.
Sell off your car if you have one. Cut back on vacations.
AND more importantly go find a job. Get income from somewhere else.
Otherwise, 6 months of expenses saved up for this event is not going to last you very long.
From my experience in financial planning, mortgage loan is the HARDEST factor for any family to adjust downwards. This brings to the next point...
Should you prioritise housing buffer over emergency cash?
If indeed mortgage liability is the hardest to be the hardest to adjust downwards, then having excess in your CPFOA is more crucial than having emergency savings.
You can't accidentally squander your CPFOA anyway.
Hence, I'd be keeping at least 6months worth of mortgage payment (Around $20k) in CPFOA at all times.
In any case, this first $20k in CPFOA also attracts 3.5% interest which is still higher than mortgage rates.
If you have not hit the max of $37,740/y, think about CPF voluntary contribution over saving up your emergency cash fund.
If you are not saving well, forget the emergency fund concept. Start moving money out bit by bit instead
In my experience, when these 2 factors combine, someone at risk financially
1) Unstable job
2) Low financial discipline
Unstable job is self explanatory.
But what is low financial discipline? It is simply spending as much as you earn.
And this issue is often not an earning problem but a casual spending problem.
If you have low financial discipline, forget about doing some online business or a sales based career. This puts you at financial risk because when business volume drops, you'd have trouble with your bills.
Being in a stable job can mask some of your problems and hopefully you start building savings with this method.
I'd this client of mine who was drawing a take home pay of $4,000 but it had been month to month for him.
He's bogged down by childcare cost, maid cost, grab cost and expensive products purchased. Nothing had been saved all these years from the $4,000 take home pay.
The conventional suggestion will be firstly save $4k x 6months into his bank account which will be $24k.
But, that runs directly inherently into the problem. Habits are hard to change.
The problem is money in the bank account and him being used to with bank account less than $1,000 by month end.
Instead, I solved it with forced monthly savings. Each month, we would move out $500 through giro. He has been buying investments that are liquid.
He had successfully done so for more than a year and now there is more than $7,000 in his pot.
Hence, if you are in the same situation, consider an external regular investing plan instead of doing emergency cash saving.
It is a solves the root cause better and is a step by step actionable plan.
If you are saving well, focus on a family's opportunity fund instead
I've this question for you.
How common is it that both husband and wife is laid off together or have a severe illness concurrently?
In any case, severe illnesses will eventually be compensated with CI and/or TPD policy payouts.
Getting laid off together? That's only if they work for the same bank I guess...
Hence, if a husband keeps 6 months worth of expense and wife keeps another, that might be too much cash kept liquid.
Keeping cash liquid in Singapore Savings Bond (SSB) at 2% for example is fine but it slows down your financial freedom journey.
Click here to watch video on SSB.
Abundance mindset is key to succeeding financially
I'm not saying " DO NOT KEEP CASH".
Rather, view your cash as an OPPORTUNITY fund rather than emergency fund.
It's a subtle change, that is towards an abundance mindset!
That means you are optimistic instead of fearful. What you focus on becomes bigger.
An emergency fund is at its heart resources that you need for an unforeseen event.
But for an unforeseen event, I believe in this saying from financially astute people.
It's never a lack of resources. It's a lack of resourcefulness.
Therefore, when you have assets, credit lines around and a dependable network of people, you won't die without an emergency fund.
Do you agree?