If I set my emergency fund based on my monthly expense which is recommended a lot from the articles I read, I only need 7.2k for 9 months - a 16.8k surplus as to what I have now. Should I put that amount to other use or stick with it?
I'd recommend 12 months of expenses, since you'll want to ensure that you have enough if you lose your job and need time to find another one. Over time you will want to have more emergency funds as your expenses will eventually go up due to inflation, and as you move into different life stages. So based on your numbers you are looking at around $10K to last you 12 months at this stage in your life. Your remaining $14K can then be earmarked for investing if you have no other immediate (<3 years to go) savings goals such as for a renovation or a wedding.
You can segregate your emergency funds into a few components to maximize their returns:
First 3 months in a high interest savings account
Next 3 months in money market funds or similar
Last 6 months in a FD/SSB or similar
This ensures that you will be maximizing your money while keeping it fairly liquid.
Some of the factors that affect how much one should hold, include things such as:
Your current age. If you lose your job in your 20s, you can reasonably expect to find another job, although how long that will take is another matter. For someone in their 50s, they may have to enter involuntary forced retirement for good and thus it would be prudent for them to hold more emergency funds to tide them over the period before their retirement income portfolio starts to pay them. I suggest at least 12 months of expenses in your 20s, increasing by 6 months every 10 years or so as you approach retirement.
Your lifestyle. Some people have been very used to a cup of starbucks a day and will find it hard to cope without it. Others may just drink it once a week or lesser, and are totally fine with cutting it out of their lives if push comes to shove. Thus you should look at what I term as core expenses, which is the expenses that will be there no matter what, such as bills, and basic food. Not every meal needs to be in a food court. Hawker food is still affordable and delicious. Segregate your expenses into the real expenses and the wants. You'll know what you really need to spend in a month should things turn bad. Have at least 12 x of that amount.
Your employment. As a self employed, I personal keep more in my reserves, as operating on a 9 months expense reserve is too little for my liking. Even if you are regularly employed, ask yourself: How long would you need to find a new job, and how would you cope if you reach 8 months of joblessness and your emergency fund is down to a month? You would probably feel even more stressed, which might negatively impact your performance at a crucial interview. I'd rather not go down that route.
Your non-cash obligations. These might become cash obligations, e.g: If your CPF OA doesn't have sufficient funds as a buffer when paying a mortgage, it will run dry rapidly should you experience unemployment and you will have an additional cash expense which you can't escape from. Your expenses will go up in this case.
Inflation. If you have put aside enough for 12 months of expenses some time ago (based on past year's expenses), you might want to review again. Inflation creeps into the picture easily and over time, what was once enough for 12 months may only be enough for 11 or even 10, even if you didn't change your spending habits. I personally continue to add on to my emegency fund every month, but only with something like $100-$200/mth just to hedge inflation. Review again every few years to ensure the amount stays meaningful and relevant to your situation.
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