What’s an Emergency Fund and How Much is Enough? - Planner Bee (2024)

Emergency funds are financial safety nets. They refer to money that is kept liquid for expenses and ‘rainy days’ and unforeseen situations, especially unemployment.

Liquid money refers to funds that are easily accessible: cash you can withdraw from the bank immediately, fixed deposits, or investments with little to no downsides should you need to cash out early.

Having an emergency fund is a practice that is arguably one of the top must-dos for an individual. It helps one be prepared for curveballs and not be caught out should the unexpected happen, especially if there are dependents reliant on you.

The size of an emergency fund, however, isn’t one-size-fits-all and there isn’t a magic number that would be suitable for everyone. Still, there is a rule of thumb you can follow in terms of how much ought to be in your emergency fund.

Here are some important factors to help determine the size of your emergency fund:

1. How stable is your job?

If you work for a sizable company with a healthy cash flow, like a multinational corporation, or if you hold a job working for the government, you can consider your job mostly stable.

If you are self-employed, working in a start-up or in a company with a history of hiring and firing quickly, your job would be classified as relatively unstable.

The more unstable your source of income, the bigger a cushion you’d need in your emergency fund.

2. How employable are you?

Your employability refers to how easily you can get a new job. There are two parts to this. Firstly, how desirable or in-demand are your skills in the market? Are many companies looking for the skills and experience you have?

Secondly, what are the unemployment rates and estimated time needed to get a new job at the place you’re located in? For instance, it took people in Singapore about two months to gain employment in 2018, while 48.4% of active job seekers in Malaysia took up to three months.

Here are some unemployment rates in Asia’s major cities to keep in mind:

Indonesia at 6.49% as at Sept’21

Malaysia at 4.30% as at Oct’21

What’s an Emergency Fund and How Much is Enough? - Planner Bee (2)

Hong Kong at 4.10% as at Nov’21

What’s an Emergency Fund and How Much is Enough? - Planner Bee (3)

Singapore at 2.60% as at Sept’21

What’s an Emergency Fund and How Much is Enough? - Planner Bee (4)

Thailand at 2.25% as at Sept’21

What’s an Emergency Fund and How Much is Enough? - Planner Bee (5)

India at 6.90% as at Sept’21

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Source of charts: https://tradingeconomics.com/country-list/unemployment-rate?continent=asia

The Covid-19 pandemic has wreaked havoc on economies all over the world, leading to rocketing unemployment rates, including a worrying 23.5% at its worst in 2020 in India. While most of these countries are still close to or within a typical zone of 4%-5%, indicating healthy economies, countries all over the world are still experiencing highly unstable job markets.

That’s a huge factor to consider when pondering employability and how much emergency funds to stash away.

3. How much do you like your job?

If your job situation has become untenable, whether due to a demanding boss, workplace bullying, or company values or culture that go against what you stand for personally, then you might be looking at the exit.

That would mean starting to prepare a larger emergency fund, since you know you’re likely to leave and should focus on putting aside more funds to tide you through the transition.

If your emergency fund is running low or insufficient to give you peace of mind about resigning and looking for greener pastures, then you may do well to think twice before handing in notice.

4. How much do you spend each month?

The amount you need each month depends on your lifestyle. These expenses include your essential monthly recurring bills like transportation, utilities, and expenditure on food, drinks and groceries. It also takes into account “nice-to-haves” like spending on entertainment, gifts, and shopping.

If you don’t know how much that amount is, it might be a good time to start keeping track since it will give you an idea of how much you need each month. The Planner Bee app can help you to track these expenses automatically.

If you are self-employed, be sure to include your business costs. For instance, if you run a start-up and are self-funded, chances are your personal expenses are intertwined with the business expenses, so be sure to add in costs like rent and salaries.

5. Do you have any ongoing loans or is anyone relying on you financially?

Both of these expenses can’t be put on hold and need to be accounted for in your emergency fund. For instance, mortgage loans and personal credit line payments are recurring payments that aren’t going to be paused when you’re unemployed. Likewise, you can’t put off taking care of the expenses of your parents, spouse or children, and even a pet when you’re unemployed. While some expenditure can be reduced or excluded, some such as medical necessities are non-negotiables. Your spouse may have a health emergency and be unable to work, leading to a greater reliance on your income, or you may be required to temporarily put work on the back burner to take on a caregiver role for a family member. Be sure to consider emergency situations like these, that could affect your ability to work or the necessity of your income.

When you are done reflecting on each of these factors, be sure to write down your expected expenses and duration of unemployment.

Let our emergency fund calculator help you determine the size of your emergency fund.

You may also use this formula to decide the size of your emergency fund:

Size of fund = (Monthly basic personal expenses + loan repayments + monthly expenses for dependents ) x expected longest period of unemployment in months

While interest rates in Banks stay low, you could look at alternatives here to keep your emergency fund growing.

I am a financial expert with a deep understanding of emergency funds and personal finance. Over the years, I have provided valuable insights and guidance to individuals seeking financial stability in the face of uncertainties. My expertise is rooted in extensive research, practical experience, and a commitment to helping people navigate the complexities of managing their finances.

Now, let's delve into the key concepts mentioned in the article about emergency funds:

Emergency Funds:

Definition: Emergency funds serve as financial safety nets, providing a buffer for unexpected expenses, 'rainy days,' and unforeseen situations, particularly during periods of unemployment.

Liquidity: The importance of keeping funds liquid is emphasized. Liquid money includes easily accessible resources such as cash, withdrawals from the bank, fixed deposits, or investments with minimal downsides in case of early withdrawal.

Individual Preparedness: Having an emergency fund is highlighted as a crucial practice, especially for individuals with dependents. It prepares individuals for unexpected events and financial curveballs.

Factors Influencing Emergency Fund Size:

  1. Job Stability:

    • Stable Jobs: Working for a sizable company or the government is considered stable.
    • Unstable Jobs: Self-employment, start-ups, or companies with a history of quick hiring and firing are classified as relatively unstable.
  2. Employability:

    • Desirability of Skills: The demand for your skills in the job market affects employability.
    • Local Job Market Conditions: Unemployment rates and the time required to secure a new job in your location are crucial considerations.

    Unemployment Rates in Asia:

    • Data provided for Indonesia, Malaysia, Hong Kong, Singapore, Thailand, and India.

    Covid-19 Impact:

    • The pandemic's effect on global economies, with a focus on increased unemployment rates.
  3. Job Satisfaction:

    • Job satisfaction influences the decision to stay or leave, impacting the size of the emergency fund needed.
  4. Monthly Expenses:

    • Tracking and understanding monthly expenses, including essential bills and discretionary spending, is crucial.
  5. Financial Responsibilities:

    • Ongoing loans and financial dependents (spouse, children, parents, pets) must be factored into the emergency fund.

Determining Emergency Fund Size:

  • An emergency fund calculator or a formula is suggested to determine the size of the fund:
    • Size of fund = (Monthly basic personal expenses + loan repayments + monthly expenses for dependents) x expected longest period of unemployment in months.

Growth Strategies:

  • Alternative Options: Exploring alternatives to traditional bank savings due to low interest rates is encouraged.

By considering these factors and using the provided tools, individuals can make informed decisions about the size of their emergency funds, ensuring financial resilience in the face of uncertainties.

What’s an Emergency Fund and How Much is Enough? - Planner Bee (2024)
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