It's crucial to Save your emergency fund in the right place

 No matter how hard we try to predict which way it will move, unwelcome surprises may come at any time.

We want to be prepared for the worst so that we can survive any downturn and our investments continue to profit once the storm passes.

Life is no different, full of surprises. Something could go wrong any day. It could be an injury due to an accident, your wife losing her job, your house being robbed, etc. In these cases, it may result in a cash shortage or jump in expenditure, or both. Everyone needs to have a nest egg to get them by until things get back to normal.

Nowadays, we may think ourselves lucky not to have to depend on a pawnshop for a short-term loan.

Banks and other lenders compete to give us personal credit. In addition, cash advances from credit cards or only repaying the minimum amount of your credit-card balance is also commonly used. However, you are likely to be charged between 20 per cent to 30 per cent interest. This means that at a time of financial crisis, in addition to a loss of income or higher expenditure, you are saddled with a debt that is very expensive to service.

A better choice for a person planning for the worst while hoping for the best is to have an emergency fund available. How much one needs to save for an emergency varies, depending on an individual's lifestyle and income.

For instance, if you are single and in your mid-thirties working in a financially sound organisation, you may only need 3-4 months of your monthly outlay put aside for a rainy day. If you are young and working freelance, or a salesman living on commission, you may need to have a cash reserve to cover your outlays for 6-9 months. On the other hand, if you are a "resting" actor, you may need to have 9-12 months of your living expenses put aside until your next movie comes along. No one knows your circumstances better than you.

Once you determine the amount you need for your emergency fund, you should strategise your savings plan. Starting from zero, you may need to save a little bit more each month to reach your target as soon as practicable.

If you typically save 10 per cent of your income (or 11 per cent of your expenses), it will take 27 months to build up a 3-month reserve. Should you spend less and save more, let us say 15 per cent of your income (or 17 per cent or your outlays), you will reach your target in 18 months. In taking this option, you will sleep well 10 months earlier.

Another piece of advice: separate your emergency fund from your payroll account or your operating account. Many people leave what remains in their daily-use account. Then, they forget what this money is for and they start regarding it as surplus cash and start to spend it.

One last word of caution: don't be greedy and try to make money quickly to build up this reserve. You may maximise returns on this safety net as long as the investment vehicle you choose is liquid enough to convert to cash in a time of need.

If an emergency arises and you get caught with your money in stocks during a market downturn, you may not get your cash back without incurring some loss of principal. Safe bets range from short-term fixed deposits to treasury funds or money-market funds.

Financial discipline is extremely important when you are saving for something unspecific and you don't know how much you may need and when you may have to use it.

Wirawat Panthawangkun

is a first senior vice president at Kasikornbank