Things happen when you least expect it. One day you just fall sick and you have to spend some cash to buy medicine or see a doctor. Worst case scenario, you might even lose your job all of a sudden. Thus setting up an emergency fund is vital, as it protects you from unexpected expenses.
We highly recommend that you save at least three months’ worth of expenses, in which one month’s expenses include of your rent, food, loan and mortgage payments and transportation costs. Of course, it depends on how much you usually spend per month, but this expenses should not include your shopping spree cost.
Now the question is, where do you stash your emergency fund? If you’re thinking of the traditional savings account, DON’T.
High-yield Bank Account
A high-yield bank account is one of the best places to stash your emergency fund. Here’s why.
A high-yield bank account allows you to earn interest on your deposits. How to spot a good high-yield savings account? Find one that offers a competitive interest rate. There are several high-yield savings accounts in Malaysia that offer high interest rate, some of them are, UOB Stash, RHB Bonus Saver, Maybank M2U Saver and others.
Other than the high-yield savings accounts, money-market accounts also offer a high amount of interest. The only difference is that your cash is accessible through web-based account management or at an ATM. You can even open a money market account online or at a local bank.
Basically it keeps your money safe and liquid. All you need to do is to find options with a minimum deposit requirement. But be aware of money market fees that could chip away at your returns.
Private Retirement Schemes
In some countries like the United States, there is an Individual Retirement Arrangement (ROTH IRA) that offers tax-free growth and tax-free withdrawals in retirement.
In Malaysia, there are Private Retirement Schemes (PRS), a contribution pension scheme whereby you can contribute to an investment vehicle to build up your retirement fund and invest.
PRS may sound similar to EPF, as the contributions also divided into two sub-accounts. Withdrawals can only be made when you have reached the retirement age of 55 years old, or in the case of death or emigration. If you wish to withdraw before retirement, you can also cash out from the sub-account B which subject to an 8% tax penalty.
But unlike EPF, PRS allows you to contribute as much as you can. On the downside, PRS has no guaranteed returns as it privately run by financial institutions. Thus it’s best to do market research on the PRS providers and their corresponding funds first to mitigate the risk of losing returns.
Negotiable Certificate of Deposit (CD)
Negotiable Certificate of Deposit (CD) is a financial savings account that usually requires a high minimum deposit. Although it is guaranteed by the bank, but it limits access to your money as withdrawals cannot be done before the maturity date, and it varies from months to years. Still, you can opt to open multiple CDs with different maturity dates.
In a nutshell, it’s important to do your own market research before you decide where to stash your emergency fund. Keep it in a place where it can safely grow while you are not using it.