The recent Novel Coronavirus has brought a timely wake up call to a number of industries and everyone else because it's a stark reminder that unexpected acts of nature can disrupt our lives. Ride hailing services, along with people in the tourism industries face worrying times because we have no clue how long or how much more severe this virus can go. The longer it drags out, the more expensive certain groceries become and the livelihoods of people in these occupations appear more uncertain.
Over the past 1 year, I've come to realise that most sensible people with decent wages have 6 months of expenses set aside. When probed further if they have 6 months of income set aside, less than half the people I meet actually have this money uncommitted. It is also with this discovery that motivated the writing of this article.
Why is it so important to set aside 6 months of income?
I know right, with or without a job, for most people, their expenses regularly falls within a certain range. Setting aside 6 months of income feels a little too 'kiasi' and takes away current spending power. However, I'm in a risk management career and I believe there's a time and space to take risk. Your emergency stash is definitely not one of them. Logically speaking, if we set aside 6 months of income, we would have an additional savings buffer to weather a prolonged storm on top of our 6 months of expenses.
If we objectively look at the possible reasons why we need an emergency fund, it's primarily to tie us through a loss of income and family emergencies. This Coronavirus is simply a timely reminder that unforeseen circumstances can derail livelihoods. Suppose we all just set aside 6 months of expenses, our emergency resources have no room for unexpected hiccups. For instance, what if this virus becomes even more wide spread and the issue stretch beyond 6 months? Likewise, even without the virus, other unwanted events like retrenchment or a family member (who didn't buy insurance) falling sick might require a sudden demand for cash. In fact, recently I've even heard Tom Bileyu (on Impact Theory) talk about a lack of an emergency fund as one of the main reasons why people end up stuck in jobs they dislike because they have no fall back to quit or become physiologically comfortable to reassess what they want objectively.
How should we get started if we have yet to put this in place?
If you are fresh out of school and yet to start on your commitments, I'll say allocate 50% to your expenses, 40% to your emergency funds and 10% for your protection planning. Once you successfully set aside your 6 months of emergency income, then you can allocate 10% to wealth accumulation and 30% to your discretionary expenses like holidays. What if you already have commitments? I think a good guide would be the 50-30-20 rule. 50% of your income should be catered to your expenses, 30% to your emergency funds and 20% for wealth accumulation & protection planning.
In the event that you feel too stretched due to prior commitments, I'll suggest working out ways to reduce your expenses. Most of the time, there will be that one less grab ride or one less bubble tea to cut away. Multiply that by a couple of days, you would have found excess cash to fund your 6 months of emergency income. If all else fails, you can use your bonus to shore up your savings.
What happens after we set aside our 6 months of income?
Once we successfully set aside this 6 months of income for our emergency fund, we can reallocate our money for our expenses, short term discretionary wants and wealth accumulation. As we grow in our job, most of us will get increments. We should then continue to shore up our emergency funds because our 6 months of emergency income would have changed and we need to make up the shortfall. This cycle will always repeat itself as we get more increments.
If you are wondering how to best maximize your savings after you set aside your 6 months of income for emergency, please speak to a trusted advisor. You can drop me a message if you do not have a preferred advisor to work with.
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Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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