What does contingency fund mean?
Are you financially prepared to combat emergency crises? If not, then a contingency fund is what you need. So, what is a contingency fund? A contingency fund is a fund where you keep money to meet expenses that arise unexpectedly.
Why do you need a contingency mean?
The prime reason why you need a contingency fund is because some situations are totally unforeseen. And some crises come uninvited. You may lose your job, your belongings may get stolen, you might lose someone dear, anything undesirable could happen. And it’s your financial preparedness that can help you sail through such crises without hassle. Such sudden financial demands don’t just rock your present financial stability but also hamper future savings. Here are two important reasons why you might need a contingency fund-
- You may say your job is secure and you won’t face any financial problem. But some crises are so large in magnitude that your income alone can’t help you out of it, you always need extra funds. And if you are a freelancer or someone who doesn’t have a steady monthly income then this needs no telling how important is a contingency fund for you.
- Because maybe the assets that you have at hand are not liquid. Yes, you have a big house that will cover all your emergency expenses. But what if you fail to sell it when you are in dire need of money? Liquidity is important!
How much should you have in your contingency fund?
Your contingency fund should be able to meet at least six months of your expenses. And you need not build it all at once, save slowly but consistently without fail, little by little. You need not prioritize your contingency fund over wealth building, you can build both simultaneously. Once you have your contingency fund in place, review it regularly to make sure it is matching pace with inflation and your rising expenses.
Where to invest for your contingency fund?
Consider two things while building a contingency fund- safety and liquidity. Some of the best investment avenues for a contingency fund are ultra-short term funds, liquid funds, fixed deposits, savings account etc.
While investing in ultra-short funds, make sure you have chosen the right scheme, as some of them invest in debt funds not of very high quality. Don’t worry about the returns from your contingency investment. If it’s going to last long, then you are going to get good returns. Savings accounts are the most liquid. Liquid funds also allow easy withdrawals and you get the proceeds within one day. Besides, they don’t have exit loads. Ultra-short-term funds charge exit loads. Besides, a couple of days are needed before your proceeds reach you. So, try to park less money here.
Contingency funds are a must for everyone. And prudent investors take them extremely seriously. If you don’t want to land yourself into trouble when an emergency sets in, having a contingency fund in place would be the best bet.