As per Oxford dictionary, a contingency is
defined as “A future event or circumstance which is possible but
cannot be predicted with certainty”. So does it mean we ignore something
we can’t control? No, we have to plan
it in any case. In Personal Financial Planning, it is the first and
inevitable step to plan for
financial emergency situations.
Why do I need Contingency Planning
- Avoid hasty decisions like breaking Bank FDs to meet the expenses.
- Helps you focus on the emergency rather than planning for funds.
- Handle the situation without disturbing financial goals.
What’s your contingency
score?
It is generally recommended
to have
a contingency fund
of approximately 3 - 6 months monthly expense . For example:
Monthly Expenses(a)
|
Rs.80,000/-
|
Average Bank Balance(b)
|
Rs.3,50,000/-
|
Cash in Hand(c)
|
Rs.50,000/-
|
Thus, your Contingency fund score
is(b+c)/a
|
5 months
(350000+50000) / 80,000
|
That’s means you have a provision of 5 months to run your
home in case of any contingency requirement, which is adequate.
|
|
If your score is more than 6 your
liquid balance needs to be corrected. You are keeping too much idle funds.
FAQS with Contingency Fund
a) I am a 60 year old individual living alone. Why do I
need to keep any money aside as contingency funds?
Saarthi says:It is
necessary for any senior citizen to have an adequate contingency fund because
of growing medical emergencies. Also, living alone makes it more vital to be
self prepared for any emergencies.
b) I am a businessman, who can easily pull out money
from the business? Why do I need contingency funds?
Saarthi says:Withdrawing
money from business to meet emergency situations at home is not a healthy
business practice. It disturbs the business capital.
c)My
husband has a job in MNC Company and we are covered by his company for any
amount of medical expenses? Do I still need a Contingency Fund?
Saarthi says:Depending solely on company’s health
cover is not advised, in case of a job change or job loss, it could be difficult
to meet any medical conditions. Also, there is always an upper limit and
conditions attached to expenses paid by company.
d) Where do I invest my contingency funds?
Saarthi says:Contingency funds should be invested in liquid assets like cash ,
savings account or liquid mutual funds. It
should be maintained at any given point of time.
Thanks and Regards
Team
Email: saarthifp@gmail.com
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