Do You Have An Emergency Fund?

In one of my previous posts, I talked about the Rule Of 72. I mentioned that placing money in Fixed Deposit account is like losing money as the interest rate offered by the banks are much lower than the current inflation rate.

A lot of people already knew this and they are looking for investment vehicles that can earn them 8%, 10% , 12% returns or even higher. Nowadays, you can invest your money in so many things. There are the stock market, unit trusts, properties, forex…. and many more.

But what most people forgot is to have an emergency fund before investing in anything at all.

Emergency fund is extremely important. Unexpected things can and do happen. What if you lose your job? Or what if you meet with an accident and cannot work for the next few months? Without an emergency fund, you may have to incur credit card debts which will take years to settle.

Imagine having no money to buy essential items like food! You won't want that to happen just because most of your money is locked up in properties or in stocks. You may not be able to sell your properties in a short time. And you won’t want to sell your stocks at a time when the market is not favourable. That would be a major nightmare!

So how much do you need? You should have an emergency fund that is equivalent to at least 6 months of your monthly expenses. That means if you spend an average of RM2,000 every month, you will need to have at least RM12,000 in your emergency fund.

Where’s the best place to keep your emergency fund? You may want to place it in liquid investments, so that you can take your money out at short notice. A good place will be the Fixed Deposit Account. Savings Account is suitable also, but since Fixed Deposit offers a higher interest rate, the latter is preferred. In Malaysia, you can also place your money in the Amanah Saham funds managed by PNB as it offers a much higher returns.

If you do not have an emergency fund, forget about any forms of investment! Forget about the share market, the unit trusts and buying properties. You are certainly not ready yet until you have an emergency fund that can last you for 6 months.

Start building up your fund today. It’s never too late! Every month, save 10% of your take home pay and use it to build your emergency fund. Once the fund reaches the required amount, then and only then can you start the real investment game!