Covid-19 is a worldwide concern, and on a national scale it is no exception. Since Malaysia has implemented the Movement Control Order, #StayAtHome has become a trending hashtag among social media users. This order has left some of us with unpaid or half-paid leave and that is something to be worried about especially for those who have been living from paycheck to paycheck. How can you afford to pay bills or stock up your kitchen with 2-weeks worth of food supply in this dire time? Be it a movement control order or any other unexpected circumstances, you won’t have to deal with financial stress if you’ve established an emergency fund in the first place.
Unforeseen circumstances such as sudden loss of income (such as now for many people) or an unprecedented trip to the hospital might happen. As a result, it could affect your life negatively if you aren’t prepared for them. To put this into perspective, Bank Negara Malaysia has found that more than 75% of Malaysians find it hard to save even RM1,000 for emergency purposes. This is certainly something to ponder on.
An emergency fund can be more rewarding than you expect. Apart from tiding you through bad times, it gives you peace of mind as well. You can consider the emergency fund as a form of insurance. Why do you get insured? By purchasing life insurance, for example, is to provide financial security to your loved ones after your demise or if you’re no longer fit for work. But the truth is, not everything can be insured and a sudden crisis needs a quick solution. And even if your insurance does cover it, it will take a while before getting your pay-out. With that in mind, how can you not have an emergency fund?
Before establishing an emergency fund, have a think about your goals. Setting a goal helps to keep you motivated as you’re saving towards a purpose instead of saving merely because a financial blog told you to do so. Think of the emergency you’re reserving the money for. Either a house or car repair which rarely occurs but could cost you a lot, or a sudden loss of income like what most Malaysians are experiencing currently which might lead you to live off your emergency funds for quite some time. The goal can be for short or long term depending on your situation. You can start by deciding how many months of reserve you need, and do the math from there. Ideally, you should have at least 6 to 12 months worth of funds.
Most of us do not know how much we actually spend in a month. But you’ll be surprised once you start tracking your monthly expenses. List down all your necessary expenses such as rental, transportation, food etc. To help you allocate your funds into different categories of needs and wants vs savings, consider our 6 Jars Budgeting Method to help you get started.
The rule of thumb is – do not sabotage yourself even before you start. Set goals, but make sure they’re attainable. If you’ve been struggling to make ends meet, putting even a penny aside can be very difficult. Do not get too ambitious or hold on to the mantra ‘go big or go home’ when you’ve just started. You might tend to give up at one point when you find it too hard for you to reach your goals. Taking baby steps allows you to build an emergency fund while committing to other financial priorities as well such as loan repayment. But if you’re the sole breadwinner of the family, consider putting more into your emergency fund as you’re now feeding more than just one mouth.
Why do people have an emergency fund in the first place? To cover any unforeseen circumstances that might hit them one day. The purpose of an emergency fund is to have your money available in case of any unexpected event. Ideally, your funds should be kept as liquid investments so that it can be easily converted into cash when you need it.
If willpower or being absent-minded is an issue, you can have it automatically transferred from your paycheck to a designated account during each pay period. This way, you are prone to spending whatever you have left instead of saving whatever you have left.
If you’re one step ahead in establishing a rainy-day account, you’re doing great! But if you haven’t, now it’s time to start. It’s never too late or too early when it comes to financial management. Bear in mind that going into debt is the last thing you would want to do when an emergency hits. Build your emergency fund quickly and brace yourself on whatever life might throw your way.
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