Why You Need an Emergency Fund.

One of the important items that you must have in your personal financing plan is an emergency fund.

As the name suggests, it is a fund that is to be used when you are facing an emergency. It is recommended that you have between 6 to 24 months of your monthly income as your emergency fund. Six months is too little.  I think an emergency fund that is able to cover 12 months of your monthly expenses should be sufficient.

Emergency account must be separate from your savings account. This indicates that the two funds are distinct from each other. Your savings account is comparatively more fluid. You can be using your savings account for those periodic expenses, such as quit rent, house maintenances and as such.  

Emergency fund is solely to be used to cover your expenses in case of you suddenly losing your livelihood (which is becoming quite common these days).Having an emergency fund prevents you from panicking. You can plan your next job/ venture with assurance that you are financially secure for at least the next 12 months.

Emergency funds are not for growth but peace of mind.

If you have debts, especially credit card debts then I would recommend that you allocate a bigger part of your spending plan to paying off your debts. There is no set formula how much to set aside for paying off your debts as against building your emergency fund but the interest rate charged to credit card being in the very high region, it makes financial sense to clear off your debts as soon as possible.

In a perfect world, the best approach is to build a solid emergency fund first and then settle your debt. But life is rarely that tidy and everyone’s financial situation is different.

Even as you put money in an emergency fund, continue to pay down the credit card debt. Maybe you are spending way too much money. If your expenses are too high on variable stuff — going out and eating out too much — you need to cut back and sacrifice.

Generally, if you have a total of RM 5,000 a month coming in and you know (because you’ve made a spending plan) that your expenses are RM 4,000 a month, you’ve got RM 1000 left. You can set aside RM 700 to service the debt and RM 300 in the emergency fund.

The plan is simple but you must sacrifice and work hard building an emergency fund, while paying off your debts.