Step 01
Level: beginner
Job loss, reduced income, illness, home repairs, car breakdown or family events can all create immediate cash pressures. If you do not have an emergency fund, you are likely to have to borrow money, withdraw investments at the wrong time, or use high-cost credit cards.
A good portfolio can still fall apart if you are forced to sell assets when the market drops just to handle short-term expenses. An emergency fund acts as a buffer between real life and your investment plan, preventing you from having to sacrifice your long-term goals for a temporary event.
When you have a few months of living expenses prepared, you have more time to think and make choices. You do not have to accept a poorly suited job, an unfavorable loan, or make hasty investment decisions just because you are short-term cash-strapped.
Emergency funds should be kept in a safe, liquid and low-volatility location, such as a savings account, short-term deposit or quick withdrawal account. The goal of this money is not to maximize profits, but to ensure you have the money when you need it. Therefore, do not keep your emergency fund in stocks, crypto or assets that can plummet when you need to withdraw.
Single people with a steady income and few obligations can start with 3 to 6 months of essential expenses. People with families, fluctuating income, paying off debt or working freelance should consider 6 to 12 months. The number should be calculated based on necessary living expenses, not all comfortable expenses.
Instead of trying to reach a large number right away, divide it into milestones: first 1 month of essential expenses, then 3 months, then 6 months or more depending on the situation. Each month, an amount is automatically transferred to the fund as soon as income is received. Once you have used the fund for a real event, prioritize replenishing it before increasing spending or investing further.
Emergency funds should only be used for events that are unexpected, necessary, and have a clear financial impact. Buying on sale, going on a trip, upgrading your phone or making a hot investment is not an emergency. The clearer the rules, the more the fund retains its role as financial protector.
A emergency fund is set aside for events that are unexpected, necessary, and have a clear financial impact.
Amounts needed to live and work normally such as housing, meals, transportation, medical care, mandatory tuition and minimum debt repayment.
The ability to convert assets into cash quickly without experiencing significant loss in value.
Certainty of revenue over time. The more volatile your income, the larger your emergency fund.
The fund can be for 1 month, 3 months, 6 months or 12 months of essential expenses depending on personal situation.
Funds should be in highly liquid accounts, short-term deposits or low-volatility instruments; should not be located in high-risk assets.
Actual events include loss of income, medical care, necessary repairs or family responsibilities; purchasing and investing opportunities are not urgent.
Relatively stable income
If essential expenses are VND 12 million per month and work is stable, the initial target could be VND 36 million to VND 72 million for 3 to 6 months.
Uneven income
If your monthly income is high and your monthly income is low and you are supporting your family, a 6 to 12 month fund of essential expenses helps reduce the pressure of losing customers or late payments.
Investment assets can decrease just when you need money. Emergency funds prioritize safety and quick withdrawals.
Funds should be based on essential expenses in defensive mode, not maximum living standards when income is good.
If you withdraw funds for travel, buying things or hot investments, the fund loses its protective role when real events occur.
Exercise 1 - calculation
If your essential expenses are VND 15 million per month, calculate the fund size for 3 months, 6 months and 12 months.
Exercise 2 - case_study
A person has VND 80 million in cash and 0 investment. How much should they keep as an emergency fund if essential expenses are VND 10 million per month?
Exercise 3 - reflection
Write down three situations in which you are allowed to use your emergency fund and three situations in which you are not.