In the previous month, I talked about the importance of having an emergency fund. This will put us in a better place to deal with surprises and curveballs in life.
Sometimes, this sounds like a no-brainer as most of us are well aware of this. Yet, according to some statistics published in the media, we are constantly reminded of the dire situation among consumers. The most infamous one is the Bank Negara Malaysia study that showed 75% of Malaysians would struggle to come up with RM1,000 to deal with unexpected situations.
This is the kind of number that makes me feel frustrated, and sad at the same time. On one hand, people gladly use this revelation as a ‘sales tool’ to create a need for consumers to buy their financial products. On the other hand, it does highlight a serious scenario that needs attention. People are finding it hard to save, and worse, deal with any unexpected situation, which we’re almost ‘guaranteed’ to face in life.
As painful as it sounds, I really hope I can play my part to help people build up their savings. Here’s some suggestions that you can use as a guide in your efforts to build up your own emergency fund. I hope this will help make it easier, and together, we’ll bring down that 75% to a much lower number!
A Ringgit Saved = A Ringgit Earned
Commonly, people tend to say “I will save what I have at the end of the month”. Just because most people adopt this mindset, it doesn’t mean this is an effective approach. In fact, based on experience, almost everyone that struggles to save money has told themselves this. The results shows that this mindset will only get us limited results.
If you’re a salaried person, have you ever struggled to pay your income tax bill? The answer is most likely “No”. Why do you think this is? That’s because, before the money even reaches your hand, it’s already been ‘taken out’ and ‘paid’ to where it should go.
If you’re still not convinced, how do you think your EPF account continues to grow in size each year? While the dividend is a good reason, however, the main reason you see the amount grow is due to the regular contribution, which again, before you can ever touch it, has already been redirected towards your EPF account.
If you want to see a different outcome, from “I can’t save” to “I am saving”, you just have to change the sequence. Save first, Spend the rest. It’s as easy as this!
Where do you keep this money?
Keeping your savings in your salary-receiving account is never a good idea. A majority of people I’ve interacted with seemed to know this. Some of them who have trouble saving up their emergency fund tend to keep this money in a separate account.
However, this account also tends to be their ‘day-to-day’ account. Perhaps that’s another reason why your savings won’t sit there for long. We’re creatures of habit, and our basic instinct is wired to spend money. To build on this instinct, we’re also constantly bombarded by messages, advertisements, and opportunities that induce us to spend and part with our money. This eventually creates an inevitable outcome, which is helping us to spend.
For what it’s worth, do note that there’s nothing wrong with keeping your emergency savings in your day-to-day account. It’s just that it increases the likelihood for the money to leave you. For example, in the middle of last month, I saw my day-to-day account still had about RM4,000.
This immediately made me feel excited knowing I still have RM4,000 to spend for the next two weeks. However, when I checked my credit card usage for the past 2 weeks, I noted that the balance has already built up to about RM2,000+. This instantly means my real spending amount is not RM4,000 (although the money is there), but just the leftover after paying off my credit card.
This is what is likely to happen to emergency savings if mixed with your day-to-day account. And since emergency savings are so important, you should avoid this possibility at all costs.
In general, an ideal place to keep this money will be a place that we don’t have to worry about the value of the money. This means it shouldn’t be placed in accounts or asset classes that tend to be volatile. The idea is for it to be easily accessible anytime we need it, and as soon as possible.
How much do I need to save?
While there are plenty of guides or rules of thumb offering answers to this question, please note that you can actually determine this. You don’t have to let existing guides tell you how much you need to save up.
Have you ever tried travelling to the moon? I can confidently ‘predict’ that most of you haven’t or even thought about doing this. For things that you don’t think is possible, chances are you’ll never even bother trying to do it.
Another common situation I tend to encounter often is that people ‘plan’ to save a huge amount, or when they apply the rule of thumb, the projected amount made them feel hopeless. This feeling ends up making them feel defeated, resulting in them giving up trying. To them, this amount is like travelling to the moon!
When it comes to emergencies, we can never predict what will happen, hence it’s impossible to predict how much we’ll need. Therefore, you can aim for emergency savings as low as RM1,000. Even RM50 can be crucial. Imagine someone without any savings, who one day needed to go to the clinic to get a consultation for a fever. To them, RM50 is a huge deal.
So, if you’re low on your emergency savings, don’t despair. Start saving up in small amounts. It’ll be better than when you haven’t set aside this small amount that doesn’t seem to matter now. When you’ve built enough momentum and have a small fund, start to make it a goal to save up for one month of your expenses, then three months, then six months, then a year or more.
Just like collecting water in a tank, you must ensure you store as much as possible and refill it to the maximum level each time you use it up when there’s a water disruption. If you have to dip your hand into this pot in between, make it a point to refill it.
About the author
Kevin Neoh is a NextGen Money Coach who works with people to help them transform their relationship with money to improve their lives with the money they have. Kevin can be contacted at email@example.com and www.kevinneoh.my.