Contingency fund-A must in financial planning!


No matter how many plans one makes, life always has a different plan of its own.
One may have a solid and accurately chalked financial plan but emergencies seldom come with prior notice. This is why, one of the most important, but yet one of the most overlooked part of financial planning, is the contingency fund.



Why a contingency fund?
The importance of maintaining a contingency fund is highly undervalued. Emergencies in the form of an accident, death, loss of job, loss in business, medical conditions, etc can strike anyone at anytime. The most crucial thing during times like these is to arrange for the required funds without disturbing the rest of the financial plan. This is where the contingency fund comes into the picture.
The most important thing to keep in mind here is that a contingency fund is strictly kept aside for emergencies and emergencies alone. These emergencies have to decided and defined by the person before the contingency fund is made.

What are the features of a contingency fund?

The most important feature of a contingency fund is liquidity. Since emergencies occur suddenly, without prior notice, one can never know when one will need the money. Thus liquidity is the most essential feature of a contingency fund.
Another very important aspect of a contingency fund is the amount one should save in it. It usually depends on the individual's comfort level, but the general rule is that it should be at least equal to six months' expenses.
The amount in a contingency fund usually goes up with more number of dependents and goes down with more number of earning members in a family.

Where to save for a contingency fund?
Since liquidity is the main criteria, the best option would be a savings account. Even certain mutual funds schemes with focus on high liquidity are a good option. For eg. Ultra short term debt schemes,Flexi-deposit bank accounts,etc.

In the end, one has to ensure that the fund can be accessed easily and better still, there is also a good rate of interest along with high liquidity.

This article has been contributed by Pearl A. Shah.


0 #2 Chirag Palrecha 2011-06-16 14:00
well written....the information is quite useful...
0 #1 aashana rai 2011-06-16 11:29
dint know about the importance of this fund.
thank you.

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