What is an emergency fund?
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.
The usual recommendation is to have 6-12months of income as cash. I'd explain more on NEW FINDINGS.
I used to think it has serious flaws...
In my experience in financial planning, I've rarely seen emergency fund to be of much 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. Cash will be negatively impacted by inflation.
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.
Before we get to emergency fund myths and COVID-19, let me show you alternatives...
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.
Before that: Emergency fund may actually NOT be needed to fund hospital treatments in Singapore
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.
Why emergency fund is not needed in some layoffs: 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.
Mortgage loan is the HARDEST factor for any family to adjust downwards. That's why the earlier point on buffering CPF instead of cash.
COVID-19 situation is unprecedented!
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...
But now... COVID-19 is wrecking havoc!
During the SARS outbreak, total employment fell by 24,000 in the second quarter of 2003. Now we have lost more than 19,000 jobs already and counting. Source
Some are predicting up to 200,000 lost of jobs!
And the worse part is, the NEW job opportunities will take time to come. Simply because the economy is structurally changed. LESS RESTAURANT STAFF, LESS AIRLINE STAFF....
This is unprecedented which I never could have foreseen. I've a video below on SIA to share with you
Conclusion: Emergency funds is NOT a myth, it's just how much is needed.
I think times like these are hard. Families have mouths to feed.
Maybe 6months emergency cash is not an exaggeration anymore. And very recommended.
Do prioritize housing buffer in CPFOA first because of the 3.5% interest in your first $20,000 there.
Beyond that, speak to a qualified adviser on it if in doubt.