The importance of emergency funds
The importance of emergency funds
As we approach retirement age, achieving financial stability becomes increasingly important, especially if you decide not to continue working. Therefore, maintaining an emergency fund and starting to plan for your future income are crucial parts of retirement planning. Here are three key reasons why having an emergency fund is essential:
- Rising healthcare costs: Healthcare expenses increase over time due to rising costs in medical research & development (R&D), hospitals operation and manpower costs, etc. Even with national schemes like Medisave and MediShield Life, there may still be out-of-pocket costs for GP consultations, medications or specialist visits etc. An emergency fund can help cover these unexpected healthcare expenses without straining your budget.
- Unexpected home repairs: Just like we can get sick without warning, unexpected home repairs can occur at any time. Whether it is plumbing issues or electrical failures, having an emergency fund enables you to access the cash needed to quickly resolve these issues, keeping your home safe and comfortable.
- Potential loss of income: Seniors may face reduced working hours, or potential loss of job if the company has an unexpected restructuring. An emergency fund can provide financial stability during transitions.
The Basic Financial Planning Guide recommends saving at least 3 to 6 months’ worth of expenses as an emergency fund. If you are just starting to build your emergency fund, consider saving small portions of your salary rather than trying to set aside a large lump sum. This approach can make the process more manageable and less stressful.
To avoid accidentally using your emergency fund for everyday expenses like groceries or paying for an impromptu holiday trip etc, consider opening a separate bank account dedicated solely to your emergency savings. This way, you can keep your emergency funds distinct and easily accessible when needed.
Liquidity is crucial for emergency funds. You need to access this cash quickly when emergencies arise, so it's not advisable to keep your emergency funds in fixed deposits, as you may face penalties for early withdrawal. If you are looking to earn potentially higher returns on your emergency funds, consider using a mix of savings accounts and Singapore Savings Bonds (SSBs). SSBs are guaranteed by the Government, and you can exit the investment in any given month without facing any penalties.
Establishing an emergency fund is the first crucial step in retirement planning. Taking proactive steps will not only enhance your financial security as you approach retirement but also provide peace of mind, allowing you to enjoy the new chapter of life with confidence.
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