How To Start An Emergency Fund

At this point, it’s safe to say that the Covid-19 pandemic has changed our lives completely. It has changed how we work, how we socialise with our friends, and even how we live. The pandemic has also adversely affected our economy.
Due to the pandemic, the number of unemployed Malaysians have also increased from 511,000 in 2019, to more than 700,000 by December 2020. Unemployment and loss of jobs can lead to growing financial pressures for those who are unprepared.
Therefore, it’s very important for us to build our financial resilience before it’s too late. We can do this by starting an emergency fund as soon as possible.
What is an emergency fund? Why is it important?
One thing we have all learned from this pandemic is just how unprepared a lot of us are when faced with a financial emergency.
As reported in the National Strategy for Financial Literacy 2019-2023 published by the Financial Education Network (FEN), 52% of Malaysians are not able to raise RM1,000 in an emergency. Saving for an emergency during good times could reduce the burden of having to scramble for funds when you need it the most.
The introduction of i-Citra, i-Lestari and i-Sinar by the government allowed eligible members to withdraw money from their Employee’s Provident Fund (EPF) to help them navigate the pandemic. Under the i-Sinar scheme,  EPF has approved 6.49 million applications up to June 2021 for the withdrawal of a total of RM50.93 billion. But this comes at a cost, as your EPF funds are supposed to act as your retirement fund. This means that many people that were affected by the pandemic had to sacrifice their retirement funds to avoid financial hardship.
Your emergency fund can potentially prevent you from taking drastic measures, such as having to take out money from your retirement fund or having to borrow money from your family and friends, perhaps even pawning your belongings or resorting to unlicensed moneylenders.
4 easy steps to start an emergency fund
Follow these simple steps to start building your own emergency fund.


1. Track your monthly expenses
The first step you have to take is to record and keep track of your monthly income and expenses. This will help you understand and see how much you need from your monthly income for your commitments and decide how much you can set aside for your emergency fund.
According to the Department of Statistics Malaysia (DOSM), the average salary in 2020 is RM2,062. Using this example, here is how you can keep track of your income and expenses:
Monthly take-home pay RM2,000
Monthly expenses (rent, food, utilities, public transport, personal care, and others) RM1,200
Other monthly commitments (parents, ptptn loan repayment, insurance coverage, and others) RM400
Social expenses RM150
Amount that can be set aside for savings (emergency fund, other savings goals) RM250
* Monthly expenses based on the Belanjawanku guide for a single person living in the Klang Valley.
From this example, you can decide how much you can set aside for your emergency fund. By tracking your expenses, you can better monitor your spending and keep it in check, as every ringgit counts.
2. Find a saving method that works for you
When starting an emergency fund, one of the most important aspects is to have discipline. You need to be disciplined in building an emergency fund, because reaching the targeted amount and maintaining your fund is a continuous process.
First, pick a suitable saving method that you can commit to and stay focused in reaching your goal.
One of the methods that could be useful is the 10-10-10-70 budgeting method from Chief BerUang, PIDM’s savings icon. In this method, you can divide your monthly income into four categories: 10% for savings, 10% for emergencies, 10% for insurance, and 70% for your expenses. 
You can also challenge yourself to make the act of saving money more fun. Popular saving challenges like the 52-week money challenge or the envelope budgeting method where you separate your money into envelopes, allow you to challenge yourself and push your limits when it comes to saving. You can also try the no-spend weekend or challenge yourself to a no-spend -week. A no-spending challenge is a possible option during this time as many of us staying at home to help contain the spread of the pandemic.
So, all you have to do is pick a saving method that fits your needs.
3. Set a target amount for your emergency fund
Before you can set a target amount for your emergency fund, first ask yourself – how much exactly do you need in an emergency fund?
You can start by saving up to 6 months of your expenses in your emergency fund. Once you have set a target amount, you can figure out the amount of time you need to reach that target based on how much you can afford to save each month.
Total monthly expenses RM1,750
Targeted emergency fund amount RM1,750 x 6 = RM10,500
Monthly contribution to emergency fund RM250
Time needed to reach targeted amount RM10,500/250 = 42 months
From this example, you will need almost 4 years to reach your target amount. So, it’s important that you start as soon as possible and save as much as you can.
4. Find the right place to store your emergency fund
You need to consider a few factors such as how fast you can withdraw your money, the amount you can withdraw, and the dividends and profit you stand to gain over time.
Here are some options you can consider:
i) Bank savings account. Although a savings account typically offers minimal profit/interest rate of return, it allows you to withdraw your money easily.
ii) Fixed deposit account. A fixed deposit account offers a higher profit/interest rate of return compared to a savings account. However, you need a minimum amount to be deposited before you can open this type of account and you can only withdraw your money after a fixed term to earn the full profit/interest rate returns.
iii) Amanah Saham Nasional Berhad account (ASNB). An ASNB account offers dividends for your savings, which will help your emergency fund manage the effects of inflation. While ASNB accounts do allow you to withdraw your money, there are fixed limits on the amount and number of withdrawals allowed online.
Emergency funds provide a financial buffer
Even though saving money on its own may not help you reach your long-term financial goals, saving for your emergency fund remains a very important step towards achieving financial stability.
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