BUILD YOUR CONTINGENCY FUND
1. WHAT IS CONTINGENCY FUND ?
· It is money that should be kept in a liquid instrument to take care of any unforeseen and urgent need, such as medical urgency or loss of job.
· It should be specifically allocated to meet an exigency, and not for any other purpose.
· It should be your first financial goal to ensure that you are able to maintain the same lifestyle for a reasonable period of time due to the emergency.
· Other long-term goals should be considered only after this.
· It should be big enough to take care of the targeted emergency.
· A contingency fund smaller than the optimal amount will defeat the purpose of setting it up.
· A fund bigger than you require will mean an investment opportunity loss.
2. FACTORS DETERMINING YOUR CONTINGENCY FUND AMOUNT
· Your current net worth (monthly income x age).
· Your number of financial dependents.
· Your dependence in emergency – on spouse, parents, family, friends.
· Your saving % of monthly salary.
· Your frequency in exceeding your monthly expenses budget.
· Your combined family health cover.
· Your accident & auto insurance cover.
· Your loan repay % of monthly salary.
· Your likely expenses even in an emergency – on household, housing, EMIs, personal goods, clothing, entertainment and traveling.
· Your home insurance cover – building & contents.
· Your chances of getting a new job.
3. STEPS FOR BUILDING
· Identify the different emergency situations, such as medical emergency or loss of income.
· Calculate the amounts you will require for these exigencies.
· A good estimate is about 6 months of net living expenses, excluding any loans to repay.
· Break this amount into smaller amounts and try to accumulate these in stages.
· Identify the savings that can be apportioned to build this contingency fund.
· For this, you must set aside money for it before considering any other expenses.
· A standing instruction for an automatic monthly transfer to a fixed deposit, or a monthly systematic investment plan in a short-term debt fund, will enable you to achieve this.
· Also move any savings and excess income like bonus for achieving this goal.
· You should then tighten your spending on the budgeted expenses.
· Be disciplined about withdrawal from the fund only for the identified exigencies.
· After such withdrawal, you must replenish the contingency fund as quickly as possible.
· Review the fund amount periodically and increase it in line with your current expense profile.
Building a contingency fund will give you the financial security to plan for other goals.