Saving for a rainy day

So we previously talked about savings for wealth growth.

However, having a sum set aside for unexpected events is at least as important, if not more so.

Surprisingly, many Singaporeans don't save, as reported a few years ago.

Why is having a sum of money for emergencies important? I'd like to give a few reasons:

1. Emergencies are probably unexpected and urgent. It can be sudden ill health, accidents, fire, unemployment etc. In such a time, the need for ready cash is sudden and substantial, and dipping into the remaining cashflow for the month is probably not going to be sufficient. Therefore, having a sufficient stash put away for such situations is necessary.
2. Having a sum saved for unexpected events keeps monthly cashflow steady. Even during an emergency, there are still regular payments that needs to be paid, such as mortgage, bills and taxes. One would not wish to be a situation where he has to default on these payments which may lead to further problems
3. Most importantly, it steadies the mind. With an emergency stash, one does not need to worry so much about not being able to feed oneself during such unexpected events. This will allow him to be less inclined to make foolish decisions in times of crisis, as he will be less panicky, having the reassurance of a sum to tide him through.

In fact, due to the above reasons, there are many who would recommend saving for a reasonable emergency sum first before seeking to pay off all debts.

How much is enough?

Many recommend having six months of monthly salary locked away as the minimum sum, with a view of holding a one-year stash value in time to come when one is more secure. I believe that this is a reasonable value, but I will be modifying it slightly for my own context.

For myself, I will be keeping $30k for my initial emergency stash, which will be locked away as a deposit in the bank. This is not quite 6 month salary level for our family, but I believe it is sufficient for now.

Firstly, it is fortunate that my job is relatively stable. Despite the poorer upcoming economic outlook, I do not expect to be unemployed anytime in the near future, and this would allow a slightly riskier emergency stash for the moment.

Second, as we tighten our family spending, we are able to save more. For now, this savings will be going into investment purposes. However, in times of crises, I should be able to divert this sum into whatever emergency it may be.

Third, besides mortgage, we do not have any debt. Using our past savings, we were able to pay off our renovations, housing spendings and credit card bills without getting a loan. Hence, our liabilities are minimal and we are able to take more risk.

As we proceed on in our financial journey, I do aim to increase this amount slowly but surely. As it is easy to forget, I will have to keep reminding myself of this periodically.