3 top questions about saving and emergency funds

These are the top 3 questions I received regarding saving and emergency funds.

Question 1: How much should you save in your emergency funds?

Answer: The suggested emergency fund would be 3 to 6 months of the basic living expenses. This is to allow you to have enough fund to cover the basic living expenses in case any emergency event strikes you. Basic living expenses covers your food, basic transportation cost, rental and utility bills. If you have kids, you need to cover their basic education fees too. During this current pandemic, it is suggested to have at least additional 3 months fund in additional to the basic 3 to 6 months emergency fund. This is because it could take longer for the economy to recover and if you lose your job, it could take longer time before you resume working again.

Emergency fund is crucial to maintain the financial security. If there is no emergency fund, you will feel insecured!

Question 2: Where you should place your emergency fund

Answer: Emergency fund should be 100% liquid. Hence, it shall be put into saving account or fixed deposit account which you can withdraw anytime. Alternatively, you can place the emergency fund into money market fund. Placing your emergency fund into fixed deposit or money market fund will allow you more interest than the normal saving account. You can choose to split your emergency fund into several fixed deposit certificates to allow more flexible withdrawal.

Do remember not to place your emergency fund to investment. Investment has some risk and fluctuate in price from time to time and when we need the money, it might be the worst time to sell our investment.

Question 3: What is the difference between saving account and money market fund

Answer: Saving account is operated by banks while money market fund is managed normally by investment institutions or banks. Saving account has lower interest than money market fund. Money market funds are mutual funds that invest solely in cash or cash equivalent securities. They mainly invest in Certificate of Deposits (Fixed Deposits). Money market funds have no maturity date and hence allow withdrawal any time.

The interest generated from the retail money market fund is not taxable for corporates. Interest generated from saving / fixed deposit accounts is taxable for corporates.

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