Your emergency funds must have high liquidity to help you tide through unexpected expenses. Learn how and where to build up your stash.
By now, you probably know that you should have at least three to six months of your living expenses stored up as emergency funds.
These funds are to ensure that you have enough to get by, well, during times of emergency, such as when you suffer from a loss of income or have sudden medical costs to pay. It can also help you avoid going into debt should an unexpected situation arise.
However, with rising cost of living, it’s more crucial now than ever to make your emergency funds work harder for you; not only do you want to maximise the interest your money can earn to keep pace with inflation but also to grow your savings faster.
Hence, you'll want to put your emergency funds into something that’s low-risk, highly liquid, and has almost guaranteed returns.
So without further ado, these are the best places to park your emergency funds.
- How to build up your emergency fund
- Where to keep your emergency fund
- Opportunity cost of having an emergency fund
How to build up your emergency fund?
#1 Automate the saving process
It is difficult to save on willpower alone. Setting up an automated process to funnel 20% of your monthly pay into a separate bank account will keep your money out of sight and out of mind. Be disciplined and don’t touch this alternative bank account!
#2 Grow your income
In the current economic climate, we need to be more proactive in seeking a side income to supplement our finances. While nothing comes easy, it doesn’t hurt to inject a healthy dose of motivation to hustle. Need a leg up? These business ideas need little to no capital. An extra few hundred dollars a month can make all the difference.
#3 Squeeze savings out of every purchase
Comparing prices isn’t enough if you are serious about maximising your savings. The easiest way to save on purchases is through a cashback credit card, which gives you a small discount when you use it to pay for items.
Some offer a flat cashback rate across all purchases while others offer a higher cashback rate when you spend on essentials like groceries, dining, and petrol. Depending on your spending habits and preferences, some credit cards may be more suitable for you than others.
To ensure your cashback rewards really count, try not to carry over balances to the following month. This means staying on top of your credit card bill payment every month. A simple workaround? Simply set up GIRO payment so you’ll never have to worry about missing your bills.
#4 Use the blitz approach if you’re impatient
Some people can endure immense deprivation for short periods. Others can tolerate small deprivations for years on end. Decide which of the two you are.
If you can handle a massive downgrade on your lifestyle for just a year or two, you may want to ‘blitz’. This means spending a short time saving a huge amount. For example, you might want to live on just 50% of your income for the next year and a half to build up your emergency fund ASAP.
Once you hit the goal of six months’ income, you can relax considerably with your savings goals.
This is easier to do if you are young and single, and don’t have a family to support.
#5 Withhold your bonuses until the fund is built
Until you’ve built your emergency fund, any bonuses should be funnelled straight into it. You can enjoy your bonuses after the fund is established– in fact, once the fund is complete, you can have the option to splurge on something you like.
#6 Be persistent
There may be times when you are forced to dig into the fund. An emergency might happen before the fund is ready, or there may be months when you just cannot contribute. Don’t let these events derail you. Shrug it off, and go on building the fund again as soon as you’re able to.
Remember: if you find this process frustrating, you are not alone. Just grit your teeth and go through with it.
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Where should you keep your emergency fund?
An investment in stocks, ETFs, or a fixed deposit with fairly long tenure, is not the right place for an emergency fund: you may not be able to liquidate (i.e. convert into cash) such assets on short notice without making a significant loss.
This is especially true if you find yourself in need of urgent cash when the markets are down and/or your money is locked.
If you withdraw from a fixed deposit before maturity, you will lose the interest. In some cases, you may even face penalties.
Instead, you'll want to place your emergency funds in these instruments:
1. High-interest savings account
While rising interest rates mean that home loans, car loans, and mortgages have become more expensive, it’s actually good news if you’re looking to park your emergency funds in a high-interest savings account.
As a matter of fact, in line with rising interest rates, banks in Singapore have increased the interest rates for their savings account in tandem, making them more attractive to investors.
|Savings account||Interest rate||How it works||Minimum balance|
(Citi Interest Booster Account)
|Up to 2.80%||– Increase your balance by at least S$1,500
– Make three investments of S$1,000 or more
– Purchase a policy of min S$5,000 regular premium
– Spend at least S$500 month
– Take up a home loan of S$500,000 or more
– Keep your account open during your birthday month
|S$15,000 (account service fee of S$15 waived till 31 Dec 2023)|
|Maybank Save Up Programme||Up to 3.75% p.a. (for balances up to S$150,000)||– Spend S$500 + GIRO (min. S$300) for 0.95%
– Add an insurance policy or investment product to get 3%
– Prevailing interest rate of 0.15% p.a. on 1st S$3,000 deposit balance
|No min. balance until age 25 (subsequently S$1,000)|
|Maybank Fresh Funds Top Up Promotion||Up to 2.5% p.a.||- Eligible for new signups for iSAVvy Savings Account / iSAVvy Savings Account-i / Prestige Savings Account. -||Prestige account: S$20,000 iSAVvy Savings Account / iSAVvy Savings Account-i: S$10,000|
|Standard Chartered Bonus$aver||Up to 4.88%||– Spend over S$2000 + pay 3 bills to earn 1.68%
– Invest in unit trust (min. S$30,000) for extra 01%
– Buy insurance (min. S$12,000 premium) for extra 1%
– You can stack the bonus interest for insurance and investment categories
|OCBC 360 Account||Up to 4.05%||– Save and spend to earn up to 1.2%
– Save, spend AND insure or invest to earn up to 3.2%
– Annual insurance premiums start from S$2,000
|UOB One Account||Up to 3.6%||– Spend S$500 + make 3 GIRO debit transactions to earn up to 2.5%
– Highest interest rate can be earned without insuring or investing
|RHB High Yield Savings Plus Account||Up to 4.5%||- Earn 1.20% p.a. on your first S$50,000
- Additional 3% p.a. on your monthly incremental average daily balance if you top up your account from 1 Sep to 30 Nov 2022
As you can see from the above table, most banks will pay you bonus interest on top of the base interest, if you meet their criteria such as crediting your salary and spending on their credit cards.
The benefit of parking your emergency funds in a savings account is that it’s relatively risk-free and also highly liquid — you can withdraw your money at anytime you want without incurring any penalties.
That said, as mentioned above, the base interest is low, so you’ll need to meet a series of criteria if you want to earn the maximum interest.
2. Singapore Savings Bond
The Singapore Savings Bond, or SSB, has been extremely popular of late because of the record-high interest yields in recent months. In fact, the 10-year average return for the November 2022 issue is 3.21% — the highest return since 2015 (when it was first introduced).
The SSB is a type of bond that’s issued and backed by the Singapore government. So when you invest in the SSB, you’re essentially lending money to the Singapore government in exchange for interest payments, which are paid out every six months.
The SSB also features a step-up interest rate, whereby you’ll earn a higher interest the longer you hold out. And since the Singapore government holds the highest ‘AAA’ credit rating, this makes the SSB a relatively safe investment, so your money is in good hands.
You can invest in the SSB using cash or your Supplementary Retirement Scheme (SRS) funds, but you can only invest in multiples of S$500 (e.g. S$500, S$1,000, S$1,500, and so on).
While it’s a 10-year bond, you can withdraw your funds at any time even before the bond matures. You’ll also get your principal investments back on top of any accrued interest.
That said, the process isn’t instantaneous and you may have to wait up to 30 days to get your money back.
Read also: The SSB vs CPF: Which One Has Better Returns?
3. Insurance savings plans
An insurance savings plan acts like a hybrid between a regular savings account, insurance coverage, and a bank account whereby you’ll earn interest based on the amount of savings you put in while enjoying certain insurance benefits at the same time.
The two main insurance savings plans to consider are Singlife and Singtel’s Dash PET. Both offer high liquidity and are low-risk investments.
With Singlife, you can earn up to 2.5% p.a. — 1.5% for the first S$10,000, and 1.1% p.a. on the next S$90,000. Note that any amount above S$100,000 will not earn any return.
As part of the Save, Spend, Earn campaign, you’ll earn another 0.5% interest p.a. if you spend a minimum of S$500 per month with your Singlife Visa debit card. Finally, you’ll also earn an additional return of 0.5% p.a. when you sign up for an eligible Sure Invest Policy and fund a minimum of S$1,000, in line with the Singlife Sure Invest Bonus Return campaign.
Additionally, as part of the Singlife Account Special Incentive Campaign from 1 October 2022 to 31 December 2022, you can earn up to 3% p.a. of return. There’ll be a cash bonus of S$50, S$430, and S$810 when you top up S$10,000, S$30,000, and S$50,000 of fresh funds respectively.
Oh and by the way, you can make withdrawals via FAST without any restrictions or incurring a withdrawal fee.
In terms of the insurance benefit, you’ll get life insurance coverage for death or terminal illness of up to 105% of your account value.
Meanwhile, if you sign up for Singtel’s Dash PET from 12 August 2022 onwards will enjoy a crediting rate of 1.6% p.a. in your first policy year. Though, the crediting rate isn’t guaranteed.
Dash PET also offers free life protection and COVID-19 coverage, and from just S$0.02 per day, you can get up to S$100,000 coverage for major cancer, accidental death, and death and total and permanent disability.
However, the downside is that you can withdraw your funds freely as there’s a lock-in period of 12 months.
You can withdraw up to 10% of your single premium and top-ups without any penalty in your first year. However, if you want to withdraw the full amount in your first year, you’ll incur a surrender charge of 10% of your total account value.
Also, take note that each partial withdrawal will cost S$0.70.
4. Cash management accounts
Last but not least, you can also consider keeping some of your emergency funds in cash management accounts such as Syfe Cash+, Endowus Cash Smart, StashAway Simple, MoneyOwl WiseSaver, and Grab Earn+, among others. These are offered by investment platforms, brokerages, and robo-advisors.
Cash management accounts invest in cash funds, money market funds, and short-duration bond funds, so you’ll stand to earn higher interest compared to traditional savings accounts. For example, the projected returns for Endowus Cash Smart Ultra are currently 3.9% to 4.1% p.a. That said, do be aware that the returns aren’t guaranteed as it depends on the performance of the funds.
When picking a cash management account, it’s important not to immediately go for the one that offers the highest returns because it doesn’t necessarily mean it’s a slam dunk; in fact, if you look at the returns of each Endowus Cash Smart portfolio in the table below, it’s clear that Cash Smart Ultra has had the highest loss.
As the saying goes, the higher the returns, the higher the risk.
Additionally, remember that cash management accounts aren’t as liquid compared to a savings account; withdrawals typically takes 1 to 5 business days. Most of them also charge a management fee of 0.05% to 0.15% p.a.
Opportunity cost of having an emergency fund
An emergency fund isn’t all rainbows and sunshine. The main cost of having an emergency cash fund is that it will literally cost you – in value lost due to inflation. This means that you can expect your emergency fund of say, S$30,000 to be worth significantly less in 10 years.
In the case of idle cash balances, the opportunity cost is the interest you would have earned if you had conservatively invested that money instead.
If you’re savvy enough to invest your own funds, your interest earned per annum could potentially be even higher. And even if you’re not, robo-advisors like StashAway and AutoWealth are a great – and relatively safe – alternative to trading your own funds.
While it's crucial to have emergency funds, you shouldn’t be holding on to too much cash beyond what you absolutely need. Your spare cash can be used to grow your wealth through means like savvy investing which, over time, helps grow the value of your money or at least prevent it from devaluing.
An emergency fund is meant to cushion unexpected circumstances. Unpredictable events can be life-changing and expensive at the same time. Having an emergency cash fund at hand provides you with a financial buffer against debt — a whole other black hole in itself.
That said, don’t put all your savings in one instrument; split your emergency savings into different products.
For example, consider parking a few months of your emergency funds into the SSB and an insurance savings plan, and the rest in a high-interest savings account.
This way, you'll earn a stable interest from the SSB and insurance savings plan, while you can also quickly access the funds in your savings account when you need them urgently.
Read these next:
Best Short & Long Term Endowment Plans in Singapore (2021)
Fixed Deposit vs Singapore Savings Bond (SSB) vs Savings Account: Where To Put Your Money?
Endowment vs Insurance Savings vs Bank Savings: What’s The Difference?
Investment Guide: SingSaver’s One-Stop Investment Shop
4 Investing Tips I Learnt The Hard Way That All Beginners Should Know