Save on interest payment

It is important to have an emergency fund that can be used for your unexpected payments. This can save you a lot of interest payment.

Suppose you need $5,000 in an emergency - for medical expenses or disruption in your income. If you borrow $5,000 on your credit card, you have to pay interest of $100 a month (2%) on the roll over. If it takes you 2 years to make the repayment, you would have spend an additional $2,400 in interest payment, on top of the $5,000 that you borrowed (and have to repay).

If you have emergency fund that you can draw down, you can save on the hefty interest payment. But you should have the discipline to repay the borrowing back into your emergency fund - just like you have to repay an external lender.

You should  build an emergency fund of 6 months of your earnings. If you earn $5,000 a month, your emergency fund should be $30,000. You should keep the emergency fund in liquid investment, such as fixed deposit or short term bond. You should avoid investing it into a life insurance policy or structured product where there is a high upfront cost (which becomes a penalty on early withdrawal).

Remember - building up the emergency fund is your top priority - above buying a car or other discretionary expenses.