An emergency fund must be available but difficult to access. Here are the best places to stash your emergency savings in Singapore.
An emergency fund of six months of your savings is essential. It’s the first step of any financial plan. Without this fund, you may need to apply for a personal loan to cover your expenses or lose opportunities (it’s hard to switch jobs with nothing in the bank).
One key aspect to emergency funds is where you keep them. We present to you some options, and explain why it's important for you to keep your savings separate from your investments.
The Paradox: Your Emergency Fund Must Be Available But Inaccessible
Money is no good as an emergency fund if it’s locked up. If it’s tied to an insurance policy, or in a fixed deposit, you cannot easily get hold of it without incurring penalties. Your emergency fund must be available on short notice.
At the same time, you want it to be inaccessible because that prevents you from spending it. 80% of personal finance is psychology - if you keep the fund in reach, you’re more likely to spend on an impulse buy.
Here are three options that could fulfill your needs.
1. Use a Singapore Savings Bond
The Singapore Savings Bond (SSB) grows your money at around 2.5% per annum, if left to mature for the full 10 years (you will make less if you withdraw the money earlier).
However, the advantage to SSBs is that you can cash out on any month, and not lose any accrued interest. This is different from a fixed deposit, in which you generally forfeit any interest accrued if you withdraw cash before a given time period.
This makes SSBs fulfill both conditions: they money will be available within the month, when you need it. And because it’s more inconvenient to withdraw the cash (you will need to go to your bank, work out how much you’ll get, line up, etc.) you are seldom tempted to spend it on impulse purchases.
You can obtain SSBs from participating banks, and they start for as low as $500.
2. Save in US Dollars
A simple way to make your savings inaccessible (but still have them on hand) is to save in a different currency. US dollars are the safest best, as it is the least risky currency (it is not likely to suddenly plunge in value.)
One way to do this is to open a multi-currency account with a bank. This is an account that can hold different denominations of currency at the same time (e.g. you can have S$2,000, RM 8,000, USD$700 all in the same bank account). Citibank International Personal Bank currently has one of these, which is also useful to expatriates.
When the money is in a foreign currency, it is much less tempting to spend it impulsively. You cannot just walk up to an ATM machine and splurge on new shoes or a tablet when the urge suddenly takes you - and “cooldown time” is everything when it comes to personal finance.
You might also occasionally benefit from foreign exchange rates, such as when the Singapore dollar weakens against the US dollar. But this is not the main benefit, the main benefit is to prevent impulse spending.
3. Use a Separate Bank Account and Hide the Card
This is simplest way to stash your emergency fund. Open a separate bank account, and GIRO regular payments into it. Make sure the bank card for this account is out of sight, and hence out of mind.
You could lock it in a drawer you seldom use, secret it in a book you rarely open, or leave it with a more fiscally responsible spouse (don’t worry about forgetting where it is, you can apply for a replacement card fairly quickly in a worst case scenario).
Of course, be sure to pick a bank account with a good interest rate, and with minimal fees. Be especially wary of accounts that require you to spend a certain amount to maintain an interest rate (e.g. you must spend S$500 a month on retail or the interest rate drops). These options are seldom worthwhile, as you are merely stashing your emergency fund and almost never using the money.
The Big Issue of Stocks
Some people feel that blue chip stocks or Exchange Traded Funds (ETFs) are viable places to stash their emergency fund. They will argue that these stocks are not volatile, and can be sold quickly.
While these stocks are great for investments, we suggest that you separate your investments from your savings. The danger of stashing your savings in stocks is that, no matter how stable a stock price may seem, it can fall at the most inconvenient time. If you are forced to sell during a downturn, you could lose a lot of money in the process.
For that reason, you should avoid thinking of your stock portfolio as “savings”. Investments should be considered separately from savings, and you should not interfere with your long-term investments by cashing them out before financial goals are reached.