Your salary is more than enough for all your bills, children's school fees, groceries and the works. But what if, God forbid, you were to lose your job? Then what? Would you still be able to meet your expenses for the month?
Well, that's when the contingency/ emergency fund creeps in. It is important to have one at any stage of your life.
What is a contingency fund?
A contingency fund is over and above the money you put aside for your child's education, the house you plan to buy 10 years down the line, your daughter's wedding, a family vacation to the Maldives etc. Those funds have a name to it.
Contingency funds are for miscellaneous expenses that come up out of the blue.
But nevertheless you need to be prepared for them. For instance, your aged dad's medical bill, sudden house repairs and maintenance, loss of job or sudden long distance travel are not things you plan for.
You should never use your contingency fund for luxuries like a plasma TV, a swanky car or even a vacation.
Where to get the money?
An important question that might come to mind when saving for a rainy day is 'Where do I get the money from?' Well, you don't need to punish yourself to save for this fund. As and when you are able to put aside money, do it.
A credit card is extremely useful in emergency situations. You can make large payments with it while you might not be able to withdraw over Rs.1 lakh from your bank account without prior notice.
PAGE_BREAK
From salary
Once you get your salary in hand, you need to save a portion of it immediately. Yes, even before you pay the household bills, school fees etc. unless, of course, you are just about making enough money to pay up all that.
On an average you should save at least one-third of your salary. The amount you save can be used to meet various pre-decided financial goals. But you must save a part of it to your contingency fund.
Another thing you can save is increments. As your salary increases over time, you can even save up to 50% of your salary. After all, your expenses are not going to increase that much. So your contingency fund can go up accordingly.
The amount saved for a contingency fund varies from one person to the next. It depends on factors like in-hand salary, number of financial goals, monthly expenses etc.
However, a contingency fund should be at least Rs.50,000 if it is going to be sufficient to meet some kind of emergency expenditure.
From bonus
If you happen to get a quarterly/ half-yearly/ yearly bonus from your company, don't blow it up. It is the ideal way to start your contingency fund, especially if your salary is not enough to save too much.
Even if you bonus comes at a festival time and you really want to buy that exquisite saree, act as though you haven't even got that bonus. It may be difficult, but it is worth it when you really need the money the most.
PAGE_BREAK
From gifts
Cash gifts, whether for your birthday, wedding anniversary or even out of the blue, can be saved towards your contingency fund. Yes, your best friend may have told you she is giving you the money to buy that bag you really wanted. But if you don't need the bag that bad, you could save up the money.
Keep about Rs.20,000 in hard cash at home. You don't want to borrow money from your neighbours in the middle of the night, now do you?
Saving money is not enough!
Don't be content with putting some amount of money away every month. Let the money work for you and allow it to grow as far as you can.
The important thing to remember is that the money should be in a liquid state as far as possible. You should not lock it in for a very long period of time. Otherwise you will not have access to it when you really need it.
Here are some ways in which you can earn a little money on your contingency fund.
Fixed Recurring Deposits in a savings account are a good option. You have access to it whenever you want because the amount is in your account itself. The great part is it is earning some interest for you.
Fixed Deposits in the bank also are good option because you can break them at any time should the need arise.
Investing in a Liquid/ Floating Scheme of a mutual fund is also liquid enough.
Systematic Investment Plans help you put aside a fixed amount every month. You can get the money out within 24 hours. Do not opt for very risky investments; you don't want to lose the money you have saved up for a rainy day. For instance, investing your contingency fund in the stock market is not a good idea just in case the market crashes when you need the money.
Investing in health insurance, property insurance or life insurance (depending on the number of dependents you have) is not a part of your contingency fund. You need these even before you start a contingency fund.
Comments
0 comment