Can we avoid the emergency situation? – the need for contingency funds

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Future is unforeseen. Every one of us must equip ourselves to overcome any of such unforeseen and unfortunate situations in our life. Contingency funds furnish us with the money in such emergency needs. Let us understand the need for such emergency funds form a real-life situation.

Contingency can arise in your life any time – be prepared with funds

In 2007 I was working in night shift in my company, I got a call from my hometown. It was bad news, one of our eldest family member was passed. Immediately I had to visit my native place, it was too late, midnight around 1 am.

Moreover, it was month end and I had no money left in my bank account. At that moment I felt very bad for myself and my financial position. I had to borrow few thousands from one of my relative to complete my journey.

But I started thinking about what I need to do my self to avoid a similar situation in future. I started a building emergency fund, to handle this type of situations.

I used recurring deposits (Bank RD) at that time. Initially, I started with INR 500 monthly RD in few years I was able to save more than INR 10000. I felt very happy for myself. Later I started increasing the contribution to building larger sum of money.

The need for emergency funds in life 

Most of us might have faced a similar situation in their life. Few of them might have also learned a lesson.

In 2008 when subprime crisis hit, so-called global recession, many of our friends lost their jobs. They were earning in lakhs and leading comfortable lifestyle. Of course, with heavy EMI’s as well. Home loans and credit cards were easily available.

\When suddenly they were told to resign with or without compensation, they were clueless. What to do next? Finding another job or career is not easy. It will take at least 4-6 months.

How to run the family? How to manage children education? Who will pay loans?

Ok If I wanted to sell my home or property is there anyone to buy? No most of them were in a similar position. Hardly any buyer out there.

Can we avoid this type of situation? The answer is clearly no, not possible. But can we plan our self to handle this type of situation? Yes. This planning is called building contingency funds.

How much one should have for contingency funds

Contingency fund should be equal to or more than the 6-8 times of our month of expenses or 3-4 times of our monthly income. For example, let’s say my monthly income is INR 1 lakh and expenses are INR 60 thousand. Then my contingency fund should be INR 3-4 lakh OR INR 4 to 5 lakhs.

Where to save my money for emergency needs 

Yes, this is a most important step. Before investing for such emergency on must always consider that it is readily available. Thus, the fund should be easily accessible in case of emergency.

Some of them may keep their money in savings bank account and others keep cash at home. Both are not advisable.

High liquidity and Capital protection of the fund is most important in this case. High liquidity means, converting an asset to cash. For example, I have my contingency fund in a land site. In case of emergency can I sell my site in two or three days. No, it is not possible to do so. If I have a liquid fund like bank fixed deposit, then I can withdraw it in one day.

Can I park my contingency funds in equity shares or equity mutual funds? No, you can get high liquidity here, but capital may incur losses if share market index points reduce.

I need to protect my fund like in fixed deposits, I can even use pure debt funds to do so. These funds will protect my capital at the same time easy to encash.

How to build Contingency funds?

We can use two methods to build contingency funds.

One monthly contribution let’s say I’m saving INR 6000-8000 monthly towards my contingency fund. Along with this, I can move a certain portion of my other incomes toward this fund.

If I get INR 1 lakh bonus, I will keep aside INR 40-60 thousand towards contingency fund.

Also, if one of my policy got matured and I got INR 2.5 lakh. I will move at least INR 1 lakh towards my contingency fund. Similarly, think about your situation and plan your contingency funds.

What are the uses of contingency funds?

  1. In an event of loss of job or loss of pay due to an accident.
  2. Loss of job due to employer decision or cost-cutting.
  3. Loss of income due to the health issue or loss of a family member
  4. Handling medical emergency (either self or any family member)
  5. Need to travel on an emergency basis.
  6. Any natural disaster or accident at home
  7. Loss of valuables due to theft, fraud or any other reasons.
  8. Loss of an asset (such as vehicle, property)

There are many other uses. There was one general proverb –

‘How much ever money it is not enough.’

Similarly uses are many, but to use it first we need to save it.

In the above write up we learned few important points about contingency funds, How to build fund, its uses and what asset to choose to accumulate money. Hope you liked this article. If you have any questions or suggestions, please mark an email to dial@moneydial.com. For more such information visit our facebook page. You can also register with my advisors portal.

Thank you all.

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3 Comments

  1. One need to have emergency fund in liquid fund so that encash in urgency….good artical Vikram….keep sharing

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