How big an emergency fund?

Tue, Apr 06, 2010

The Straits Times
 
By Gabriel Chen





Everyone should set up an emergency cash fund, but the question is: How much money to put aside?

This will depend on your circumstances - whether you have children, carry substantial debt and what kind of insurance coverage you already have.

Still, most financial experts believe you should set aside between three and six months' worth of your living expenses in your emergency fund.

The most common reason you will need to dip into this emergency fund is a sudden loss of income.

Wynnes Family Office founder Carol Seah believes a six-month reserve is slowly proving insufficient.

'A 10- to 12-month reserve is more likely,' she said.

The key is to start small, especially if you find it difficult to save money or find your fund size too ambitious to achieve.

The important thing is just to start.

'Always break it down into smaller milestone goals. Start with the goal of accumulating a month's reserve, then three, six and so forth,' said Ms Seah.

Do not stop saving, even when the fund has reached the target level you have in mind.

Financial Alliance associate director Tea Eng Peng said that even when your target level is achieved, you should still continue to contribute a proportion of your monthly income.

This is to ensure you can 'channel it to other resources when the timing is right, such as property, education or even business'.

Keep this emergency fund fairly liquid - not in stocks, for example - so you can get to the money quickly in the event of an emergency.

Always re-evaluate your fund from time to time to see if it can be improved.

This article was first published in The Straits Times.