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A special chest for emergency funds.

Wednesday, November 13, 2013

I talked about war chests and I talked about emergency funds before. Now, we might keep the latter in a chest as well but it should be designed differently from a war chest.

The chest we keep our emergency funds in should have double or triple locks compared to a war chest! Since we call it an "emergency fund", then, we must make sure that we only open the chest when there is an emergency.

In the meantime, the money will most probably lie fallow. Well, almost, anyway.

What? Remain in a savings account to make a miserable 0.1% in interest per annum? Why don't I invest it in a REIT and make 7% to 8% per annum? Sure, why not?

Before doing that, please redefine what is an "emergency fund". Maybe, it should be "a fund kept for times of need but it might not be there when needed".

An emergency fund has to be money that is close at hand and it has to have certainty. Certainty in uncertainty doesn't count.

So, where should we park our emergency funds?

The best choice is probably a S$ Fixed Deposit. The Deposit Insurance Scheme we have in Singapore provides us with a peace of mind too. Certainty? Certainly.

Read more about the Deposit Insurance Scheme: here.
The Deposit Insurance Scheme protects depositors in the event a DI Scheme member fails by compensating insured deposits up to a maximum of S$50,000.

Related posts:
1. Why a meaningful emergency fund is important?
2. Emergency fund: How much is enough?


Solace said...

Haha AK,

I was more distracted by the the background picture than the fixed deposit promo rates. LOL

"Strength through Stability" What was that? a book? a new healthy cereal that you have been eating? haha

AK71 said...

Hi Solace,

It is the front cover of an annual report of a company I am a shareholder of. I used it as the background because I thought the slogan quite apt. ;)

hydrogenperoxide said...

Which bank promo is that? :P

AK71 said...

Hi pero,

I was wondering if someone would ask this. Economical way to spread the word, isn't it? No fancy brochure. ;p

UOB. Uncle Wee so thrifty. :)

BP said...

I use SCB bonussaver as my emergency fund. its 1.88% pa if u spend at least 500per month which is not difficult to hit if you have a family.

unfortunately that rate is only applicable for 1st 25k in the account. well that's good enough for me. 6months of Expenditure liquid enough that I can take out anytime

AK71 said...

Hi BP,

Wow! Get rewarded for spending money! Sounds like you got a good deal! ;)

anon said...

Bulk of my cash is with cimb starsaver which earns 0.8% pa, and comes with free cheque book.

AK71 said...

Hi anon,

Thank you for sharing. 0.8% sounds pretty decent. :)

I wonder, however, if there are sufficient "locks" with a regular savings account. ;p

SnOOpy168 said...

Thanks for the heads up. Those 4 months / 12 month, does it mean that i cannot withdraw them during this period ? or that if I do, interest paid will be pro-rated or penalized ?

AK71 said...

Hi SnOOpy168,

Of course, we could break the FD in case we had an emergency. However, interest payment would be calculated as if it were a regular savings deposit then (i.e. it would be lower).

Best to check with UOB. I could be mistaken. :)

My 15HWW said...

Hi AK,

If the rates stay (not just promotional), I might be interested.

If one has $40,000, can create a fixed deposits ladder to ensure $10,000 of liquidy every month, if needed.

AK71 said...

Hi Stoical Keynes,

I like the way you think. :)

To the best of my knowledge, UOB has been offering "promotional" rates every month this year. ;)

SnOOpy168 said...

I am still debating whether to classify this cash holding as war chest or emergency funds or (one day to come) pocket change.

Now that I am KLKK, not having a monthly paycheck anymore.

Parking them into >8% yield stocks is very tempting, esp when there is a recent dip.

AK71 said...

Hi SnOOpy168,

Without knowing the full picture, it is hard for me to say what I would do if I were in your shoes.

However, as a rule of thumb for me, set aside a sum that is equivalent to 24 months of routine expenses. This is the emergency fund.

Then, the rest could be your war chest. :)

AK71 said...

Good stuff from my Facebook wall:

Hi Assi, thks for your insight but IMHO, the bank preference shares and Genting perpetual are more effective for the purpose of emergency funds with the possibly better risk-return scenario. Hyflux preference shares for example do not fall into my preferred choice. if DBS were to default on preference share payments, then it can be argued that the DBS FD is not secured either. I am just throwing out a different train of thought. i don't mean any disrespect.

it's not easy to sell off preference shares without taking a heavy loss because of the wide spread, esp if you're desperate. If market takes a nosedive, even pref shares will be hammered and you're rushing together with other investors for the same exit out. Not much use as an emergency fund, imo.

WTK said...

Having a warchest gives one a peace of mind. One will have the assurance of having the warchest for unexpected expenses.

I can sleep soundly at night with such assurance.


AK71 said...

Hi Ben,

To be clear, a war chest is different from an emergency fund.

We should set aside an emergency fund for unexpected expenses.

How much should we have in our emergency fund?

We should have a war chest to pounce on investment opportunities.

Be prepared for war!

Yv said...

Hi AK,
Just wondering why do you put your emergency funds in FDs as opposed to high interest rate CASA accounts like UOB One or CIMB FastSaver etc or even SSB? Is it so that you are not "tempted" to take it out, as it is relatively easier to do so with the former?

AK71 said...

Hi Yv,

Oh, I have all of the options you mentioned.

I have UOB ONE and CIMB Star Saver accounts too.

I also have money in SSB.

AK kiasu. ;p

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