Hope you have created your monthly budget. If not, don’t give up! Press on and let me know if you have any difficulty.

Now the second step of preparing for your first investment is

I = Insure Against the Unexpected.

This is a step that most investors fail to do before beginning to invest and end up in a fix when an unexpected mishap befalls upon them. A famous investing mantra is “Invest with what you can afford to lose”. While no one invest to lose, we must bear no illusion about investing either. It can potentially be a rough journey, and while we minimise our risk, there is no absolute guarantee that we won’t lose our money in the near term (we will win in the long run!). Therefore, we must ensure that our needs are covered during emergencies so that our investment can be spared. You never want to be forced to sell your investment prematurely at a loss because of any unforeseen emergencies.

Image Source: The Economic Times

Create an Emergency Fund

In addition to the health and medical insurances, you must create an emergency fund. The purpose of an emergency fund is to provide for your living expenses during a short period of no income. For example, when you are unexpectedly retrenched during an economic downturn or when you are unable to work due to illness or injury. If you do not have an emergency fund to depend on, you may be forced to sell your investment for cash even if it means selling at a loss.  It is also very important that the emergency fund fulfills your desired lifestyle. The key word is desired. A frugal person could probably survive on $600 each month while still staying with his/her parents. But a family of 4 may require $2000 each month just to keep the lights on and put food on the table.

The rule of thumb is to keep aside enough money in the emergency fund to provide for at least 6 months of living expenses. You may choose to create a larger emergency fund but 6 months should be the minimum.

How to Invest Your Emergency Fund

The emergency fund needs to be highly accessible or fluid because you never know when you will need it (unless you are a fortune teller). But that doesn’t mean we can’t invest them for some meaningful returns! So long we invest them in capital assured and highly accessible investment.

These investments include fixed deposit, online savings account and government bonds.

Fixed Deposit: FD usually provides about 1-3% interest annually depending on the length of the FD. The longer the tenor, the higher the interest rates. However, take note of FD in foreign currencies. While they may provide higher interest rates, you are subjected to foreign exchange risk. For example, if you invested in a FD based on Malaysia Ringgit (MYR), you would have lose quite a lot recently due to the significant depreciation of MYR. To be safe, just invest in FD based on your local currency.

Online Savings Account: These are online accounts that provide higher interest rates, about 0.5-3.5% annually. They offer higher interest rates than the usual savings account because they are solely managed online with no physical statement hence less admin charges for the banks. Take note that such savings account are usually bundled with other requirements which you must meet in order to receive the higher interest rates. Examples include crediting your salary, minimum credit card spending and minimum number of online transfers.

Government Bonds: There are many bonds out there hence this is the more complex option. For the purpose of an emergency fund, you should only invest in those with no withdrawal penalty and are not publicly traded. The reason for not publicly traded is to safeguard the capital. I won’t dwell too much into this but safe to say this is for those who are more savy with bonds. I would strongly recommend government bonds over corporate bonds as the former are more stable and guaranteed (unless it is the Greek Government).

Now a bit of ranting. I hate financial advisors who try to sell financial products to you but never invest in those products themselves. I only believe in providing recommendation that I have personally have tried and found beneficial.

Just to share, I put emergency fund in both FD and online savings account. Since it is only meant for emergency use, I definitely won’t be withdrawing them anytime soon hence allowing the interest to accumulate. And if I ever need to withdraw them, I am willing to give up the interest accrued (survival is more important).

Fixed Deposits

For FD, I always go for 12-month tenor as they are a good balance between the tenor length and the interest rates. This also ensures that all my FD always mature at the same time allowing me to take advantage of any offers by the banks.

Pro Tip: Banks tend to have FD promotion during festive period so try to time your FD’s maturity to those periods

Online Savings Account

For online savings account, I personally use the OCBC 360 account which provides up to 3.25% annually if you fulfil their requirement. If you are a working adult, it should be easy to meet them. DBS and Bank of China also have similar online savings account with similar interest rates.

Pro Tip: OCBC’s online banking has an awesome user interface and OCBC’s ATM doesn’t attract queue! (I hate queuing up at the ATM)

Final Tip for Emergency Fund

Another tip when allocating your emergency fund: Split them in different investments. If you placed all your funds in one investment, you will have to terminate the whole investment, even if you may need to withdraw just a little. This is particularly true for FD.

For example, if you have $100k in emergency fund. You can split it up into two portions of $50k in FD and online savings account. Usually, online savings account’s penalty for withdrawal is lower than FD. Therefore, during emergency, you can choose to withdraw from online savings account first. This will allow the FD to continue to accumulate interest without affecting it.

Now, take action and create your emergency fund! Don’t worry about creating the emergency overnight. I personally took 2 years to save up enough for my emergency fund. 

I hope you enjoyed this post as much as I enjoyed writing it! Leave a comment below if you have any questions and difficulties in creating the emergency fund. I would love to help. Otherwise, just introduce yourself and say hi!

Next week, we will go into the third step of preparing for your first investment.

See you next week!

Investing Always,

Pete

Please refer to the disclaimer here