SG Budget Babe
Asked on 09 Dec 2019
I always see people Commenting to the community here that they need to ensure they have 6 months of savings for emergency funds. But some say is 6 months of your expenses while some say should be 6 months of the the salary.. Which is correct or let's say, better?
6 months from the age of 20 to about 40. Bump it up to 1 year from 40-55. 2 years from 55 to 65. And finally 3 years of expenses after retirement till the day you die.
Only use this money for emergencies only.
10 Dec 2019
6 to 8 months on salary is a good guide.
Hi Jia Jing!
6 months of emergency fund is a good guide as you cannot predict when bad things happen. For example, Retrenchment, medical bills etc. You will need this cushion for these events and at the same time quickly source for alternative income to help support!
Definitely, 6 months of emergency funds based on expenses would be the immediate priority.
Adding an additional buffer would be better.
You may gauge this by total 6 months income, 12 months expense, 12 months income, or lump sum additional buffer of eg. $5,000 - $10,000.
Meaning that should anything happen, this buffer allows your 6 months emergency fund expenses to remain untouched.
Hope this helps!!
It should be expenses. Imagine if your income was rather high, that would be a problem.
This figure also needs to be adjusted according to your age (as you near retirement, it should be higher)
Although most people recommend 6 months for young graduates, I prefer to 12. In the event that you lose your job, it may be quite hard to find a new job within 6 months in the current economic climate. With the stress of watching your bank account deplete, you will find it hard to focus on finding a job.
It depends if:
Salary Expenses (ideal)
Expenses Salary (not ideal)
And take the higher tier. It's always good to keep more.
6 months of expenses at the least. If you want to be more conservative, cant go wrong with 6 months of income
Funds to cover 6 months of expenses would be great!
Firstly, we need to have a complete understanding on our cashflow. Through this process, we will understand our earning ability and spending habit. Here is a guide to help you: https://www.blog.pzl.sg/understanding-your-personal-cash-flow/
Under the section on on Basic Financial Ratio, you will have the formula for
Rainy Day Funds = 3 to 6 months of total monthly expenditure.
Here is an explanation why:
Definition of Emergency Fund: The amount of money required in the event of a crisis, e.g. retrenchment, family needs, illness. Consequently, this money is used to ensure that we have sufficient financial liquidity and is able to live our basic lifestyle.
On 6 months of Savings: Since emergency funds is meant to be exhausted, there is no need to have savings. Hence, we shouldn't consider the amount that we need based on savings.
On 6 months of salary: During an emergency, we do not need our full salary. Instead, what we are most concerned with is the expenses that we need to take care of. Therefore, calculating our emergency fund based on salary will result in an over-estimation.
6 months of total expenses:
Total Expenditure = Fixed Expenses + Variable Expenses
As a general rule, we will want to have 3 to 6 months our total monthly expenditure. During this period of time, we are supposed to tide over any crisis that we have and to resume our normal role and get back to work before we hit the half-year mark. Otherwise, we risk being in an undesirable scenario where we are exhausting our money faster than it needs to be.
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It should be based on your expenses but personally I went for "6 months salary" because I'm more conservative and kiasu. Minimally have a 6 months expense as emergency fund. If you don't spend much or you've just started to work or have a low salary, you may want to increase the number of months of salary.
The rule from finances book is 6 months of EXPENSES
however it is purely up to u if u want to use income instead.
i feel expenses is more than enough for most pple
6 months of expenses would be the base/minimum way to go, but for me, since I manage and feel that expenses < salary, I go for 6 months of salary just for that additional buffer/margin of safety.
Objectively, 6 months salary is the bigger pie so to speak and hence is the “better” one.
That said, different people will be at different stages. If you have difficulty saving 6 monthly salary before moving on to say the investment piece and you want to hit the metal while it’s hot, it’s not wrong to proceed on with just 6 months expenses.
Either way is ok I think.
Both are right. 6 Months of expenses is a more accurate way, since it is like saying you have 6 months to live without needing a salary, so you can give up the saving or investing part of your salary and only count the expenses. (serious in an emergency, forget about saving or investing).
And obviously in an emergency, your expense is probably lower than usual. (skip the weekend buffet, skip the weekend drinks)
Having said that, 6 months of salary is not wrong too, it allows you more buffer in case the emergency situation drags longer and longer.....
I will say aim for 6 months of expense ASAP first, mark a milestone, then carry on to 6 months of salary later. ^.^
In my opinion, it's better for 6 months of expenses because if anything were to happen, the following 6 months you do not have to worry about your fixed spendings. However if you can build it 6 months of your income, why not! Better to have some spare cash as backup in case of any emergency
I would say go with 6 month of essential expenses and place them in high interest bank account for liquidity (eg: StandChart Jumpstart, CIMB FastSaver etc)
Have another 3 - 6 months of non-essential expenses and keep those in high yield, less risk investments (eg: SSB, bonds etc)
In the event where you need more than 6 months of essential expenses (touchwood) at least you will be able to moderate your expenditure based on the additional 3 - 6 months and will not be forced to a loan or liquidate your investements.
Expense is sufficient! (as many others have said). I would include a bit of buffer though.