Asked 4w ago
I’ve been reading up on building my emergency fund and it’s usually advised to be about X times my income.
The thing is my income has been going up consistently and it’s faster than I can get to saving X times the new amount.
Also, although my income has gone up, my spending hasn’t really. Shouldn’t my emergency fund be based on my spending rather than income?
(This is not meant to be a brag, am just confused while reading different articles online)
The purpose of emergency funds is to help you temporary tide through an unexpected event (retrenchment, hospitalisation, etc.).
A rough guide would be ~6 months' worth of expenditure since basic costs will generally be stable. However, it is up to you to decide on the amount as contingency. If you feel you need 12 months' worth of expenditure to be safe then so be it.
I think you should take such articles with a grain of salt. The purpose of people tagging emergency fund with income is for convenience. The purpose of an emergency fund is, as the name implies, for emergency.
Eg. What happens if you get Covid? Or get involved with a car crash.
You need to decide how much is required. A good rule of thumb is - x months of your income.
Use your expenses as a gauge of your emergency income.
In fact, if your income goes up consistently, thats a good problem.
You should look instead into how you could maybe reduce taxes on your income rather than building more emergency funds. Eg. Topping up cash into your CPF SA account could give you up to $7k relief.
Alternatively, you may consider saving or investing it for future goals.
There is no rule saying that your expenses should increase when your income does!
Yes I agree with you that it should be based on your spending not income. Your spending should nvr increase proportionally to your income, or you'll nvr amass wealth.
Your emergency fund should cover at least 6 months’ worth of expenses. To determine this amount, add up how much you spend in a single month on things that you can’t go without (e.g. food), and the contributions you owe each month (e.g. monthly savings or a mortgage).
Remember that if you were to lose your entire monthly income, your savings goals shouldn’t be compromised-- they’re there to make sure you reach your long-term life goals! Don’t let an emergency get in the way of that.
Look at your expenses and find the base level. Use that as the gauge and multiply that to find your emergency fund. The multiply factor depends on your risk profile/appetite.
Even though your income is increasing, your expenses should be fairly constant to some extent, unless lifestyle creep and you are busy keeping up with the Joneses/Kardashians etc.
Alternatively, you could portion your monthly income in percentage to emergency fund, savings, investments, expenses etc. So you always cover the key items. Automate it as much as possible.
You can use spending as a guage of the emergency funds. and add a buffer of 30%
If you are risk averse, 12-15 months is good
I make videos about interesting stuff at youtube here
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:
As a general guideline, keep 3 to 6 months of your total expenditure as emergency funds (details in the link).
Meanwhile, it is great to have a rising income over time, while keeping your expenses low. In this case, you may wish to consider channeling this additional surplus into other financial instruments that are capable to help you grow your money more efficiently.
I share quality content on estate planning and financial planning here.
Another way to approach this is to think long-term and reframe your savings to be retirement savings. There's a prevailing train of thought that by 30, we ought to save our annual salary and by 40, we ought to save 3 times our annual salary.
this 1-min video by CNBC details these benchmarks that you can strive for: https://www.youtube.com/watch?v=wMCfO3y-JEc
ultimately, all these benchmarks are just arbitary numbers though. i say save as much as you can, up to a figure that will bring you inner peace and clarity. :)
Hi yes. You are right, it should be based on daily expenses.
People tend to use income as gauge because its may be used to cover the loss of income during crisis like the situation now. Some companies are cutting down employees. And if they used income as gauge, they tend to have a large sum of money to tide over longer period. E.g. 6 months income can be use to tide over 1 year instead of 6 months basic expenses which can only tide over 6 months.
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