When I was starting in the financial planning services industry, we were taught to maximize our funds all the time. Let your money work for you. Just set aside enough funds for emergency — especially for unexpected situations like the pandemic we’re facing now.
However, in this uncertain time when our investments are still tied up and/or in the negative, we shouldn’t withdraw the funds. If you badly need it and withdraw or pre-terminate, you may incur losses. That’s why whenever there’s a financial crisis, people say that “Cash is King.”
Why is cash king?
Cash is king because you have the liquidity to use the money for whatever emergency arises in the family. It could be loss of work, or sickness. On the other hand, cash can also be used when opportunity arises in the market. It can be a new investment fund opportunity, new products for your business, or cheap property acquisition.
For the business owners who were liquid during the pandemic, they didn’t seem to experience difficulty with their cash flows and they were even able to thrive in the crisis.
I encourage you start accumulating funds. Start with 20% of your income set aside for emergencies.
But if you can do more than that, why not? That would be better. We don’t have much expenses during this time anyway. No gimmicks, no travelling abroad, no shopping — except online shopping.
This excess disposable income can be the start of your emergency fund.
Set a target amount on how much emergency funds you want to accumulate.
How much is enough?
Pre-COVID times, it should be around 3 months of your monthly operating expenses if other members of your household are also earning. But if you’re the sole breadwinner of the family, you need to set aside around 6 months of your monthly expenses. Now during uncertain times, you might need to double it.
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