What decision methodology to use when preparing an emergency fund?

Decision Methodology:

• The recommended approach is to base the emergency fund amount on your monthly essential expenses, not your total monthly income.

• This ensures you have enough to cover your basic living costs (housing, food, utilities, etc.) for a certain period if your income is disrupted.
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Consideration for Amount:

• You can use this online calculator to do the math, but most financial experts recommend saving 3-6 months' worth of essential expenses as an emergency fund.

• The exact number can vary based on factors like:

1. How stable is your job? The more unstable your source of income, the bigger your emergency fund needs to be.
2. How employable are you? There are two parts to this. First, how desired are your skills in the market? Are many companies looking for the skills and experience you have? Second, what are the unemployment rates and time needed to land a new job in your country? For instance in Singapore it took about 2 months for people to get a new job in 2018. While in Malaysia, 48.4% of active job seekers took up to 3 months to find a job
3. How much do you like your job? If you’re in an unbearable job either due to a demanding boss, workplace bullying, or company values that go against your personal values, then you might want to start preparing a larger emergency fund. Since you know you’re likely to leave, you should focus on saving more funds to tide you through the transition. If your emergency fund is running low, you may want to think twice before handing in your resignation.
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, expenses on food, drinks and groceries. If you don’t know how much that amount is, it might be a good time to start keeping track. An app can help you to track these expenses automatically.
5. Do you have any ongoing loans or is anyone relying on you financially? The more dependents you have, the bigger your fund needs to be
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Where to Keep the Funds:

• The emergency fund should be kept in a safe, liquid account that allows easy access, such as a high-yield savings account or a money market account.This ensures the money is readily available when needed, while also earning some interest.

• Avoid investing the emergency fund in riskier assets, as the priority is preserving the principal.
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Keep 3 things in mind:

1. Review and update the emergency fund amount periodically as your financial situation changes (e.g., new job, changes in expenses).

2. Consider building the emergency fund gradually over time, rather than trying to save the full amount at once.

3. Ensure the emergency fund is separate from your regular savings and checking accounts to avoid accidentally spending the funds.

3-6 months

Dependa on your liability like mortgage and number of dependents. The more you have the more months you should have, in terms of expenses.

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They are kept in HYSA and SSB.

• 3 to 6 Months: This is a common range. Choose based on your comfort level and risk tolerance.
• Factors to Consider:Job Stability: If you have a stable job, 3 months may suffice. For freelancers or those with irregular income, aim for 6 months or more.
  Health: Consider health-related emergencies (medical bills, disability) when deciding.
  Dependents: If you have dependents, lean toward a larger fund.