Updated: June 15, 2020
The other day, someone asked on Facebook: “Where should I put my emergency fund? I don’t want it just to be in a savings account because it’s not earning much there. Is there a better place to park it?”
I browsed through the comments section and read a lot of horrible answers. When I say horrible, I meant suggestions that are outright wrong and you should NEVER keep your emergency fund there.
Wrong Places to Put Your Emergency Fund
Someone suggested that they can just get a life insurance, particularly a VUL. Saying their money would grow faster than a bank savings account, but at the same time, be covered for emergencies.
This is WRONG. Life insurance is important because it provides financial protection in case of your death or disability, but it’s useless for most financial emergencies.
If you lose your job, your life insurance policy can’t cover your daily expenses while you look for new work. If your child gets seriously ill, it can’t cover for the medical expenses.
How about if something important for work, like your mobile phone or laptop, gets stolen? The life insurance company will not buy you a new one or give you a replacement.
Your emergency fund is there for you, when an urgent and important expense happens to you. Your life insurance is there for your family, if death or disability happens to you.
Meanwhile, someone also suggested to invest in the stock market instead. It’s easy to withdraw your money there, but at the same time, the growth potential is high.
This is WRONG. The stock market is a high-risk investment. It is volatile and unpredictable. You risk losing money when it’s down and you have no choice but to sell your shares at a loss because you need cash.
Moreover, what if it’s Friday night and you suddenly have a financial emergency? Your money won’t be available to withdraw in your stock market account until Monday.
Several also suggested to invest the money in mutual funds. Just like the stock market, it’s easy to withdraw your money here and you get to earn higher than a savings account.
This is WRONG IF you choose the wrong type of mutual fund. For the same reasons why you shouldn’t put your emergency fund in the stock market, it’s also a mistake to invest in equity funds, index funds, or balanced funds.
These funds invests in the stock market, which makes it likewise volatile and unpredictable. The risk of losing money is there in case of a sudden financial emergency.
And speaking for funds — it’s also WRONG to put them in Unit Investment Trust Funds (UITFs) that have stocks in their portfolio such as Equity UITF and Balanced UITF.
Correct Places to Keep your Emergency Fund
So where should you put your emergency fund? Your options are in a bank ATM savings account, a high-interest bearing savings account, a time deposit account, and a low-risk investment (mutual fund or UITF) such as a fixed income or money market fund.
My emergency fund is 12 months worth of my expenses. And this is how I keep it:
- 1 week worth of expenses (WOE) as cash at home
- 3 weeks WOE in an ATM savings account
- 3 months WOE in a time-deposit account
- 8 months WOE in a money market mutual fund
I recommend having at least 6 months WOE as your emergency fund. If you’re single, healthy, and employed, that should be enough. I have 12 months WOE because I don’t have a regular salary and I also financially support my parents.
Moreover, you don’t need to copy how I distributed my emergency fund across several instruments. At the very least, have half of it in a bank savings account, and half in a low-risk investment or time deposit.
Personal finance is personal. And how much your emergency fund should be will depend on your spending habits, medical coverage, lifestyle, and current sources of income.
You can check my Emergency Fund Calculator to have an idea how much yours should be.
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