Emergency Fund and Its Components: A Personal Perspective
This is not a financial advice, please consult with your financial advisor before making any financial decisions. This is a living post about how I maintain emergency funds and considerations around it.
# 💰 What Is Emergency Fund
Emergency fund is a cash/fund that I can access quickly, it needs to be available to withdraw whenever I need it. The fund is meant to be used for unforeseen emergencies which happens all the time like sudden car repairs, hospital bills that are not covered by insurance, or even a sudden job loss.
I separate emergency fund from my investment account to avoid mixing it up when there are good investment opportunities that I'm very eager to take. I'm quite confident in my ability to spot good oppoprtunities but I also have a historical 100% failure rate at timing the market, separating the emergency fund will help me to sleep better at night while I'm waiting for the market to go up.
In the case of job loss, I want to take my time to search for jobs that I'm interested in, I don't want to be in a position where I have to take any job just to pay the bills. My thought is if I have 12 months of emergency fund, then I would be quite comfortable to take around up to 6 months(half of the emergency fund spent) to search for jobs or try out new stuffs to make money.
# 🧮 Estimating Emergency Fund
Estimating how much fund I need to keep is quite simple, first calculate the essential monthly expenses, then after that multiply it with the number of months I want to be covered.
Suppose my essential monthly expenses is around $2000 and I want to be covered for 12 months then I need to keep $24,000 in the emergency fund. Currently I can sleep well at night with 12 months of coverage. I keep it very flexible, whenever I see more uncertainty I would add more months of coverage into the fund.
The super ideal state would be to keep the emergency fund to cover up to the longest recession period in history, so that there are enough fund coverage in case the worst happen again. I think the first Great Depression lasts around 12 years, my 12 months of emergency fund coverage is still miniscule.
# 🏦 Where to Keep The Fund
I keep 60-70% of the funds in a saving account, the rest goes to a deposit account. I split the saving account and deposit account to 2-3 banks top banks to avoid single point of failure, just in case shit happen and some of the bank goes down. It's better if you have access to dollar saving account to balance currency risk as well.
Specifically for deposit account in Indonesia, make sure the deposit amount and the deposit interest rate is under the requirement of LPS (Lembaga Penjamin Simpanan).
# 💅 How to Maintain The Fund
I keep it simple, set a recurring calendar event to review emergency fund per 3 months. I put the variables to consider in the calendar:
- New average of essential monthly expense in the last 3-6 months
- Inflation rate
- List down uncertainties at review time, things might change a lot
Then recalculate the fund as needed, ask a question to myself, does the current emergency fund still keep me sleep well at night? If not what do I need to do to help me sleep better?