Emergency Fund

I've just completed my emergency fund. In case you are guessing, an emergency fund is used when you suffer a lost of income. Life must go on and yet money is required. That's where emergency fund comes in. Read any financial books, one of the criteria of a good financial planning is to have an emergency fund.

Some time ago, I read the book "Automatic Millionaire" by David Bach. According to him, one of the criteria of an emergency fund is that the money must work for you as an investment. Meaning to say, its a waste if your emergency fund stays stagnant without growing because an emergency fund could be as much as tenth thousands of ringgit.

Books on financial planning will suggest that you have an emergency fund of 3 to 6 months of your monthly salary. How much to choose its totally up to you. Its a feel good factor on how long you think you can secure a new job in case you suffer lost of income. As for me, I'm comfortable with 3 months salary. Among the reasons that I can think of why we need emergency funds:

1. In case you are terminated by your employer, you will need time to secure a new job. This can sometimes take up to 2-3 months. During financial crisis, anything can happen. So, be prepared.
   
2. If suddenly you are diagnosed with a critical illness. Treatment can take weeks, sometimes months. A normal company will only give you up to 20 days of medical leaves per year. Any extra medical leaves required will eat up your annual leave. Once you are out of annual leaves, you have to take up unpaid leave. Unpaid leaves will certainly reduce your monthly income.
   
3. There are cases where employer fails to pay their workers for up to a few months during economic crisis. You certainly need your emergency fund during that period.

These are a few criteria that an emergency fund must have from my perspective:

1. It must be easily accessible i.e liquid.
   
2. It must grow at a slow rate.
   
3. It must be in separate account from your day to day money.
   
4. It must be invested according to Syariah.
   

Having listed my criteria, I actually contemplated on a few options as my emergency fund. My first option was Fixed Deposit (FD). Before the economic downturn, FD can fetch rates up to 3.5% annually. But now, you are considered lucky if you can get a rate of 2.3% per year. While FD is a good place to invest your emergency fund, it still depends on the banks rate which will only increase the longer you park your money there.

My second option was a Money Market (MM) fund. I've done my analysis on this and the return on MM fund is not that good. You can barely fetch up to 2.5% annually. This is certainly not good in my book. Anyway, the service charge for this fund is quite minimal. Only 0.25% of your investment amount.

Next is in Tabung Haji (TH). I already have an existing account with TH for my hajj preparation. So I prefer not to mix them up. On another note, TH is giving quite a good consistent return of 2 to 3% annually after zakat.

Amanah Saham Bumiputera (ASB). I have actually taken out all my investments in ASB due to the halal and haram issue. Its really up to that individual to decide. Some says its harus and some haram. If you think its not an issue, then go ahead. ASB do give good consistent return of 7 to 9% per year without any service charges. Where else can you get better investment than that?

Option that I choose was Income Fund (IF). An IF is actually a fairly conservative fund. When making comparisons between IF and MM fund, IF actually gives better return. The return ranges between 3-4% per year. Besides, the service charge is the same at 0.25%. So I've decided to take up a bit more of risk for my emergency fund in order for the money to work harder for me. Hopefully with the return, I would not have to add to my emergency fund later in case there is a change of lifestyle where I require my pool of emergency fund to be bigger. Besides it complies to all the 4 criteria that I've mentioned above.

Before investing my emergency fund in the Income fund, my emergency fund was actually mixed up with my day to day money. I left my emergency fund in my savings and current accounts. One thing for sure is that I never always felt that I have adequate money since the emergency fund is always on my mind. Whenever I want to spend money on big ticket items, I was not sure whether my emergency fund is adequate or not since they are all mixed up. Now for sure, I can sleep better knowing I've separated my emergency fund from my day to day money. Its a simple task but yet important

So if you have not started your emergency fund, start studying your options today. Its a good financial planning foundation. Good Luck!