In The Bedokian Portfolio, I made a very brief mention about the emergency fund1. I also stated that it is up to you how much your emergency fund should be and it must not be mixed into the Bedokian Portfolio's cash component.
One of the questions that I had was how to build this emergency fund in the first place. I did not cover this part in the ebook as this issue is more of a personal finance topic than an investment one, but just to answer the question, I will provide some guidelines on how to go about it.
Setting the Quantum
The first thing you need to do is to set your quantum. As I had said in the ebook, it depends on the individual; be it by a number (e.g. S$5,000.00, S$10,000.00, etc.) or by the number of months’ worth of income/expense (e.g. 3 months, 6 months, etc.). Different situations may warrant a different quantum, like a family person's emergency fund amount would usually be larger than a single person's, since the former would have to consider his/her dependents.
The key thing is to be comfortable with the amount that you set, and then work towards that figure.
Allocate Your Income
I think most of us are no strangers to allocate our income, since we had picked the habit of saving part of our allowances for some item that we wanted to buy from our younger days. If you already have a plan in place, like "I must put aside 10% of my income for my emergency fund", then it is easy since you have a clear timeframe of achieving the quantum required.
To build it faster, here are some key tips:
- Designate a "no-touch" bank account to store your emergency funds - this is to prevent you from dipping into your emergency funds for your everyday spending, whether accidental or intentional. It is best to open an account with another bank (to reduce its accessibility through internet banking or the common ATM card) and if possible, keep the ATM card away from your sight.
- Do not mix emergency fund allocation with your normal savings allocation - this tip would see some heads growing question marks, but there is a rationale to this; your savings allocation is meant for an aim, like a vacation, a new computer, etc., while the emergency fund is for an emergency, such as tiding over unemployment or medical bills for yourself or loved ones. Consider your emergency fund as a "cash of last resort".
- Maximise saving efficiency through lifestyle and insurance - this is a very broad tip and it covers the aspects of going through some lifestyle changes and utilising insurance policies to reduce spending and increase your savings efficiency. I shall not go through the details of it, but it involves living within your means, life hacks and use of insurance to mitigate high unexpected costs, especially on health and accident issues.
Administering the Emergency Fund
The title of this section is a bit of a misnomer, for in my opinion the emergency fund should be handled as simple as possible. You just need to transfer or deposit the designated amount immediately on payday, and then just check it once in a while to see if it hits your quantum.
Once you have hit it, just let it grow, until you have enough buffer to start your Bedokian Portfolio investment. Even then, you could continue to top it up and let the spillover amount serve as cash injections to your Bedokian Portfolio.
Bear in mind that the quantum that you set aside for your emergency fund is not absolute. Do adjust accordingly if there are some changes that require you to up the limit, such as additional dependents or an increase in your salary and/or expenses.
The above serves as the Bedokian’s rough guide on building up the emergency fund. If you have better ways to go about it, then feel free to go ahead with it.
All the best!
1 – The Bedokian Portfolio, p64-65