After we assess our financial situation and set our financial goals, we will come out with a financial plan or investment plan. Earlier, I have stated that paying off all the debts should be the first step in our financial plan. So, if we have paid off all the high interest debts, then we should save money and invest to gain more money with money.
Many people neglect the first step before they invest, they do not have any cash for emergency case, so when they need some cash urgently, they need to cash out their investment even their investment is facing paper loss. This is not the right way, as investment need to be long term.
An emergency fund is very important for us before we start to invest. The objective of investment is to earn money comfortably and make our future life better. So, when we invest, we should make sure we are comfortable with the investment and we will not worry about the investment everyday until cannot sleep or cannot eat. By having a sufficient emergency fund, we should not be worry about our investment and let the investment grow over the time.
Then, how much is sufficient for an emergency fund? This depends on our expenses. Normally, financial advisors will advice us to prepare an emergency equivalent to our 6-month expenses. This can make sure we still can survive for 6 months if we lose our job suddenly. For those who are still single and not the main source of income for the family, you can consider preparing an emergency fund equivalent to 3-month expenses. It is not easy for career newbie to accumulate 6-month expenses as emergency fund.
How we can prepare the emergency funds? We should save a portion of our salary, maybe 10% or 20% every month to accumulate this emergency fund. The best way to put this emergency fund is Fixed Deposits (FD) which we can cash out money immediately (if it is business day) if we need the money urgently. If your job is extremely safe and your income is not the only income for the family, you can consider putting 70% of it into FD, and 30% of it into some low risk funds, such as bond funds.
Many people neglect the first step before they invest, they do not have any cash for emergency case, so when they need some cash urgently, they need to cash out their investment even their investment is facing paper loss. This is not the right way, as investment need to be long term.
An emergency fund is very important for us before we start to invest. The objective of investment is to earn money comfortably and make our future life better. So, when we invest, we should make sure we are comfortable with the investment and we will not worry about the investment everyday until cannot sleep or cannot eat. By having a sufficient emergency fund, we should not be worry about our investment and let the investment grow over the time.
Then, how much is sufficient for an emergency fund? This depends on our expenses. Normally, financial advisors will advice us to prepare an emergency equivalent to our 6-month expenses. This can make sure we still can survive for 6 months if we lose our job suddenly. For those who are still single and not the main source of income for the family, you can consider preparing an emergency fund equivalent to 3-month expenses. It is not easy for career newbie to accumulate 6-month expenses as emergency fund.
How we can prepare the emergency funds? We should save a portion of our salary, maybe 10% or 20% every month to accumulate this emergency fund. The best way to put this emergency fund is Fixed Deposits (FD) which we can cash out money immediately (if it is business day) if we need the money urgently. If your job is extremely safe and your income is not the only income for the family, you can consider putting 70% of it into FD, and 30% of it into some low risk funds, such as bond funds.
The last thing to remember, while our expenses increase along the way, our emergency fund should increase as well. Review our expenses regularly and add more into the emergency fund to maintain our emergency funds to be always equivalent to our 3-month / 6-month expenses.
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