Year 2016: Lesson on Emergency Funds

Also Year 2016 – My leap year in life with no stable income. Emergency Funds became paramount.

That was the year I took a leap into a life of Network Marketing. There was no steady paycheck and if I rested on my laurels, I’ll get zilch for income. It was stressful, but definitely one of a kind experience in life. No regrets.

Before it all began, I have done my calculations so that, if all things go South (which it kind of did), I would be able to survive doomsday. Or so I thought.

At this juncture, you would assume I have some emergency funds when I did this jump. Actually, no. I don’t have a saved up 3 / 6 / 12 months cash sitting in an easily accessible account for such occasions. I have at most my last month’s salary credited in my savings account and slightly more. The concept of Emergency Funds was quite different for me then.

That is Mistake 1.

Where, then, is my survival fund (Yes, we are calling it this now)? The nearest accessible fund is in Fixed Deposits. As we all know, if we take out the fixed deposits before it matures, we would be forfeiting the interest rates. Next up, the bulk of my survival fund are invested in the stock markets.

Accessibility became a big problem.

I made 2 very huge assumptions when I did my calculations on how my survival fund would be able to sustain me.

• The fund value do not change throughout
• There is no exceptional expenses that would throw me off tangent

I came to learn that both assumptions were so very wrong. And that… is Mistake 2.

The income from Network Marketing? Negligible. However, this is not a mistake. I have already accounted for this.

My first step was to withdraw my funds in fixed deposits, despite needing to forfeit the interest rates. Survival was more important. That gave me a runway of about 4 – 5 months.

Life was decent until the first batch of funds ran out. Then, the real challenge began: “How to decide which stock to cash out for survival?”

At that point, half of my portfolio was in profits, and the other half was in losses. I had to decide. So I made a decision to segregate them into 3 categories:

• Never sell
• Have potential to grow
• No hope

Only 1 share made it to the “never sell” category and I held it till today – IGB REITs.

I began to cash out the “No Hope” stocks first. These were all loss making stocks with no turnaround potential in the near term.

The biggest issue about having stock market investments as part of the survival fund? The share prices move. As if God has a sense of humour, my portfolio value was falling throughout the year. This puts additional pressure to the survival fund.

There were shares that I had to cash out for a (huge) loss to replenish my cash account, only for them to rise in value the next month. Big lesson here.

I was lucky to be able to live on my not-so-ideal survival fund for over a year, but that depleted my net worth to a small fraction of what it used to be.

There were a few big lessons from this 1 year stint. Some of which relates to emergency funds.

• Availability of an emergency fund enables us to face no-income days better
• Emergency fund is best to be in cash or cash-like instruments
• Having a x-month emergency fund does not mean that you will have x-month exactly because there will be unexpected expenses

So, coming out of this, I started to accumulate funds in a high-yield savings account. When the opportunity presents itself, I target to move up to 50% of the funds into my ASM account as it is easy to take out and fetches a pretty high low-risk return.

My goal is to accumulate 12 months’ worth of emergency funds so that I can weather a year of no-income. The absolute amount that is required in that account will vary according to the lifestyle inflation, which is reviewed every year.

I’ve seen people say that they only keep 1 month worth of expenses in cash and the rest invested everywhere. I can only say – been there, done that, no more.

As someone once mentioned to me before, “You don’t really need an umbrella until it rains, but it sucks to not have one when it does rain.”

Do you have an emergency fund? How much?