Financial consultants say that while almost everyone plans for the future, many forget to reserve funds for emergencies. Experts tell SHAlINI SAKSENA how crucial it is to prepare financially for exigencies
Thirtytwo-year-old Vinit Singh had planned for every eventuality — he had a pension plan in place, medical health insurance, life insurance plan and even an investment portfolio that would give him good return. What he hadn’t planned for was a situation where he may be without a job. To meet the household expenses and pay his children’s fee etc, Singh had to borrow money from his relatives.
Financial experts say that had Singh kept aside a certain sum of money every month as a contingency fund, he wouldn’t have had to borrow. So what exactly is a contingency fundIJ “It’s a kind of reserve fund put aside to handle unexpected needs of money arising outside the range of the usual expenditures. Keeping in mind the present lifestyle, each one needs to maintain this fund so that in case of any emergency normal savings or long terms investments are not dipped into,” Rishi Mehra co-founder of bimadeals.com, a Delhi-based company says.
Agrees Anil Rego, CEO and founder of Right Horizons. “No matter how many plans one makes, life has their own plans. One may have planned for financial goals, the emergency comes without prior notice. To avoid such situation, one must plan for contingency fund. The fund is the amount of money kept aside to tackle the unforeseen events in life like accident, job loss, medical emergency, death etc. Contingency planning is a part of risk management. People realise the importance of contingency funds when they do not plan it and get trapped in such situation.”
And how much should be allocates towards itIJ Financial consultants tell you that this depends on an individual’s comfort level. However, thumb rule says that at least four to six months’ expenses should be kept aside for this fund. “Expenses would include all the necessary expenditures, outlays for luxuries can be excluded. Basically, expenses like household expenses, medical emergency, EMIs and child’s school fees should be considered. The first goal should be to save for contingency need. One can also set aside certain percentage of their salary for a contingency need,” Rego advises.
Therefore, liquidity is the most important feature of contingency fund. The best option for contingency fund can be a savings account. If one wants better returns then flexi-deposit can be chosen. Even liquid/ultra short term mutual fund schemes can be considered for contingency fund. Mutual fund can be exited in a day’s notice. Some of the mutual fund offers ATM card so one can withdraw money from ATM machine anytime,” Rego tells you.
So, the best way to manage this fund is get over the mindblock that why should one save for a situation which isn’t likely to arise. “People find it difficult to built and manage contingency fund. It looks difficult at one go but laying a foundation is vitally important. To manage it hassle free, an account can be set up which will be used when the emergency arise. If one is investing in debt/liquid mutual fund, fix the fund and keep pouring the money set aside for contingency fund. Also, it’s very important to rebuild the contingency fund once it’s utilised. let’s say Rs3 lakh is kept aside for contingency fund. Suddenly, a need arises and Rs1 lakh is spent on it. In a subsequent months, the deficit of Rs1 lakh should be fulfilled by monthly savings,” Rego explains.
Hence the approach should be that one should maintain four times the amount of monthly expenses in this fund and invest in something where one can withdraw within 24 hours. This can be a fixed deposit or even liquid funds. The rest of savings can be invested as long term and shouldn’t be touched for any other purpose but emergency.
“Keeping money in saving account or current account isn’t a good contingency fund option as the rates are very low and keeping money in accounts should be only limited to monthly expense requirements,” Mehra says.
How to Manage
· Set aside four to six months of expenses in a contingency fund
· If you have all type of insurances like medical, fire, theft etc then you can replenish the fund every three months
· How many people are dependent on you financially is a factor. The more the dependents the larger should be the fund
· Expenses would include all necessary expenditures. Outlays for luxuries are excluded
· Expenses like household expenses, medical emergency, EMIs and child’s fee should be considered
· One can invest this in any form of fixed deposit with the bank and link it with the account. In this way, one can break the fixed deposit and withdraw cash from the ATM.
· liquid funds are other examples of contingency funds. Anything where one can withdraw the money in 24 hours can be a good fund option