Financial experts advise people to set up an emergency fund that’s equal to six months of their income or salaries. The money typically becomes idle in a savings or deposit account, which should be liquid at any time. By liquid, it means that you should be able to access the fund easily during times of unexpected expenses like a medical emergency.
Not all people, though, can let six months of their income to remain untouched until urgent situations. If you’re thinking about getting an urgent loan, Singapore has many licensed money lenders where you can apply in case you badly need extra cash. Let’s breakdown the pros and cons of having an emergency fund or applying for an urgent cash loan.
What Constitutes an Emergency?
We have our own definition of emergencies, but we’ll focus on the basic needs for daily life for the sake of clarity. Healthcare expenses and home repairs are some of the examples. The best thing about having an emergency fund involves being debt-free. If you or someone in the family becomes ill or hospitalized, you’d no longer need to apply for a loan. This advantage of emergency funds can be a drawback at the same time. What will you do if the saved amount isn’t enough to cover the sudden expenses?
Some people rely on their credit cards as a fallback option, but you should be aware that choosing this route can be costly if you can’t pay off the outstanding balance in full every month. The idea of having an emergency fund becomes more attractive when you find out the interest rate charged for any unpaid amount on your credit cards. A personal loan will be the better option if your emergency fund won’t be enough to cover the unexpected costs.
You’re Missing Out on Inflation
While emergency funds provide you with peace of mind, the prospect of devaluing your stashed money due to inflation is a downside of not investing it. The core inflation in Singapore reached 1.7% in 2018, which means the price of goods and services have become more expensive. If you saved S$15,000 since then, the value will become significantly less by 2028 due to the likely progressive increase in inflation.
Don’t be quick to pull out your money from the bank. It’s still good practice to keep an emergency fund. Instead of six months, try to keep the equivalent amount to three or four months of your income or salary. You can save a portion of your money on familiar investments. Never place a significant amount in an investment scheme that seems unfamiliar to you, regardless of the projected returns.
Urgent Cash Loans Reduce Your Opportunity Costs
Opportunity costs refer to the outcome of making a financial decision. For instance, emergency funds cause value depreciation for money over time due to inflation. If you keep the money in a savings account for one year, the opportunity cost will be one year of potential returns if you invested the money. Personal loans reduce your level of opportunity cost, as licensed money lenders offer a specific debt instrument for people with emergency situations. You can still strike a balance between having an emergency fund and investments by looking for conservative investments.
This type of investment entails minimal risk, which is perfect for novice investors who are averse to the concept of losing their hard-earned cash. You can compare time deposit rates from different banks. Be on the lookout for some time deposit accounts with promotional rates: 1.70% per year if you place $20,000 for at least 10 months.
The Singapore Savings Bond is another option. If you invested $20,000 in May 2019 for 10 years, then the potential return could be 2.16% per year until May 2029. You should think carefully if you can afford to keep the money away while it earns interest, as you may be unable to retrieve it before the maturity period. Otherwise, you may incur fees and charges that defeat the purpose of saving and investing your money at the same time.
You can also save money in a different currency to make them inaccessible but still liquid. U.S. dollars are the most popular choice because of little to no risk of suddenly declining in value. You can open a foreign or multi-currency account with your bank. This will keep you from spending unnecessarily since the forex fees for ATM withdrawals should be a deterrent for getting the cash. Another trick involves storing the card in safe place and rarely bring it when you leave the house. You won’t be tempted to withdraw money, but you should memorize the PIN for convenience during emergencies.
Avoid Living From Paycheck to Paycheck
If you’re not keen on borrowing money or simply earn little to set up an emergency fund, the next best thing to do is to find other sources of income. How many times have you received your salary only to watch it disappear after paying bills, rent and spending on groceries? Those who are struggling to make ends meet should consider selling their old items online.
The advent of e-commerce allowed anyone to become a retailer even in the comfort of their homes. You may even close a lucrative deal if you have a vintage item like limited edition clothes, shoes or collector’s items.
You shouldn’t immediately consider emergency funds as unimportant just because there are licensed money lenders in Singapore. Licensed and reputable lenders even advise their customers to consider alternatives such as government financing assistance before applying for personal loans. If you’ve already exhausted all means and ways, then visit A1 Credit to learn more about our competitive interest rates and flexible payment terms.