Posted: 13 Jul 2008 06:03 AM CDT

Step 3 of the 7 Baby Steps listed in Dave Ramsey’s “Total Money Makeover” requires you to FINISH YOUR EMERGENCY FUND.

Emergency Fund

We discussed this in Step 1 and Dave comes back to remind us to complete the emergency fund because if you are like the many debt-ridden people featured in his book and who call him via his radio show, you will find it a struggle juggling between paying for living expenses, saving for the first $1,000 emergency fund and starting your debt snowball.

Ideally, the emergency fund should be 3-6 months your expenses or income. Taking an average wage of USD 40,000, a 3 month emergency fund translated into savings comes up to about USD 10,000. Your own level of emergency fund really depends on your own assessment of your job security. Dave Ramsey suggests that for those who are in civil service/government jobs such as US postal worker can probably hit for 3 months but those in relatively less stable careers such as sales and in industries that experience restructuring to consider building it up to 6 months.

How to Finish your Emergency Funds

Over here in the Lion City, many fellow locals see our own retirement CPF ordinary account savings as an emergency fund. That is why some people do not want to pay off their housing debt even if their CPF balances in the ordinary account are positive because these monies are statutorily protected from creditors in the event of default.

Others set aside their emergency fund in stocks and shares or fixed deposits.

Ramsey shares that the key idea of an emergency fund is liquidity. You need to be able to quickly take out that amount of money when emergencies strike. Emegency events in life can be unforseen medical bills where you need to pay the $3,500 deductible even if you are insured under a shield plan, vehicle accident, major appliance such as refrigerator breaking down and cannot be repaired. Fixed deposits while safe are not liquid. There are penalties for early uplift that include loss of interest or in some case penalty charges. Stocks and shares while liquid can entail selling at a capital loss should the market be down when you want to cash out.

The best fuss-free emergency fund location I can think of is Fairprice Plus Savings account paying at 1% interest. With treasury bills at 0.4% (7 July 2008 announcement), 1% is decent as it is a savings account with no minimum charges and no minimum balances to keep to earn that 1%.  Money Market Funds are another possibility but there is a management fee involved though they may pay a higher interest. Funds can also be relatively quickly sold at the prevailing net asset valuation and moved out as cash.

The main thing to remember is that your emergency fund is for REAL emergencies and not for lifestyle gadgets, luxury items and requires real discipline not to dip into it for PERCEIVED emergencies.

Be well and prosper.

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