“To be prepared is half of the victory”
“Emergency fund cannot be accumulated during an emergency”. I recall this particular phrase by a colleague of mine S Subramaniam, Licensed Financial Planner (CMSRL/B5591/2015). An emergency fund is money that is set aside to cover any income loss or unexpected expenses. Can we buy a car insurance after we have met with an accident?
Likewise, we can’t raise an emergency fund when we are going through a financial downhill that comprises of job losses job or reduction in income due to an economic downfall or a pandemic.
That’s right – a pandemic. The Coronavirus Disease 2019 (Covid-19) has taken not only our nation but the world by storm and has caused financial and emotional chaos around the
globe.
Whether you are an employee, self-employed or a business owner, you will be affected one way or another and will definitely learn a lesson or two from this current, critical situation. Can I sustain my current lifestyle and manage my monthly expenses for the next six months or one year?
Will I lose my source of income?
Or a possible question that is running on most of our minds; why did I not plan ahead and prepare an emergency fund?
Seems like an emergency fund is always at the bottom or mostly, does not even make it into one’s financial planning list. Why is that so?
Vague prioritisation
Whenever I ask my clients on what their financial goals are, the common answers I receive are; to buy a bigger house, to buy a new car, to go on a world tour, to build their children’s education fund, for their retirement fund and the list goes on.
For almost everyone, the term emergency fund does not even make it into their thoughts. I will tell you this; an emergency fund should be first in your financial goals and it should be given an utmost importance because it is an essential element which will help you stay afloat when uncertainties hit you without a warning.
Uncontrolled emotions
The study between money and the human behaviour is very interesting. Researches have proven that humans make irrational financial behaviours when we have money.
How many of us can honestly admit to making an unnecessary purchase in the name of ‘discount’ for something that we don’t even need instead of saving that money, by justifying that it was cheaper than normal and it’s worth the buy?
As human beings, we can’t avoid this feeling but we can definitely control it. When we have excess money, we never think twice to spend or invest it without a single thought of saving it for a rainy day. We take things for granted. Always remember that prior to spending or investing (property, stock, bond, gold, unit trust, insurance savings and etc), its most important to first set up an accessible emergency fund that we can use when stuck in a rut.
Cash flow management?
To build a solid emergency fund, you need to first identify your monthly and annual expenses. You will end up overestimating your emergency fund or not having enough money to put into your emergency fund without being familiar with your monthly expenses. You need to be very well versed with your cash flow management which plays a big role in enabling you to avoid unnecessary expenses or leakages.
A proper cash flow management will help you when faced with financial difficulties as it will enable you to decide wisely on forgoing expenses that can be avoided. The next question then, would be how much do I put in to start a sustainable emergency fund?
My advice will be to build at least a year’s worth of your expenses in your emergency fund, which will give you a one-year grace period, should you face adversity. However, that much amount could be impossible for some of us and alternatively, you can start with a much attainable figure, which is probably a three or six months accumulated expenditure.
Liquid cash is not given importance
When going through a crisis, the first thing you will need is liquid cash to manage your daily expenses and to pay your bills. Hence, your emergency fund must be very much accessible with ready-to-use money in it.
Ideally, this fund should be in the form of a fixed deposit or money market. In today’s competitive environment, financial institutions, consultants or agents will advise on building a financial fund by leveraging their investment or savings platforms. Please be careful with the terms and conditions applied in these platforms.
Always check if your capital is guaranteed and if they can provide you with a fixed return. Another important thing is the time horizon on withdrawal, the last thing you need is not being able to withdraw your money immediately during a crisis due to a time frame clause. Another important thing to note is if you will be charged an additional amount for early withdrawal.
Keen on risks
One’s risk profile is also a reason why an emergency fund is not prioritised. This can be seen in a lot of business owners; when there is excess money, their risk-taking attribute overtake them and instead of putting aside this money as savings, they are more inclined to grow their wealth.
Their focus is on investing into a new business venture, buying a property or investment schemes which can double their money. Well, there is no harm in doing all these if you have ensured that firstly, you have invested in a sustainable emergency fund which is going to protect you during a financial storm.
Gig workforce situation
The rise of ‘Gig Economy’, the freedom that comes with being an independent worker or being self-employed, has a downside of uncertain income. In other words, there is a heavier burden on these individuals to save for their emergency fund.
On the contrary, allocation is not done for emergencies when managing their own monthly income.
You have to practice the discipline of putting aside money for emergencies as part of your line item in your monthly expenses and deduct this particular amount from your paycheck before you cash out your income
With the recent movement control order in the country and the downfall in the world economy, we are hanging by a thread of uncertainty. We do not know the exact duration of our lockdown and a sustainable emergency here would enable us to breathe in relief and support our expenses for the next three months, at least. Do you have that set in place?
Good if you have; if you don’t it’s never too late. Plan now to tackle the next crisis which could happen anytime, anywhere. After all, life is all about uncertainties and the ability to handle sudden surprises.
Gunaseelan Kannan, a licensed financial advisor by Bank Negara Malaysia and a licensed financial planner by Securities Commission (CMSRL/B4198/2013), is currently pursuing his PhD research on financial planning and financial technology. He also lectures on accounting, finance and business fields in Asia Pacific University of Technology and Innovation (APU). He is the Malaysian Financial Planner of the Year 2018 and 2019 Award winner (1st Runner Up), from Financial Planning Association of Malaysia. Email: [email protected]