What is contingency fund?

Introduction
Ganesh, working in a software company, Bangalore has medical emergency to admit his father in hospital. His father has to undergo a heart surgery for that he needs Rs. 300000 immediately. He has no option left for that, his bank balance has only Rs. 20000 and all his savings are locked to the investments and tax saving instruments. If he would have had the savings on contingency fund, he has no problem to manage the medical emergency for his father.

This article explores the importance of contingency fund and how much you need to have for the contingency fund. It is one of the financial planning most investors not taken seriously. But, it is a must have in your plan. Read the following sections to know about contingency fund and hot to plan for it.

What is Contingency Fund?
As explained in the introduction section, contingency fund is to meet the unexpected expenses in your life. This could be of medical expenses, natural disaster or losing your only job. In these situations, you have to prepare a plan to handle in your life. These kind of scenarios can not be predicted when will happen in your life.
When you are investing for the future, most of the investors ignore the contingency fund and its importance. Some part of your income should be allocated to save for the contingency fund. For example, you would have a very aggressive investment strategy to accumulate your wealth for the future. But, that can not be used for the contingency purposes.

How to prepare for Contingency Fund?

When it comes to planning for the contingency fund, the most important thing is the liquidity. It must be a highly liquid in nature like having the money in the savings bank account. Even if you have the money in fixed deposit, you must close it and use it for the emergency purposes. You may have to lose the interest rates in that case. So, it is wise to have contingency fund in the savings bank account.

The general idea to have the contingency fund is equal to you 3-6 months of income. For example, if your monthly income is Rs. 50000, then you must have minimum Rs.200000 as the contingency fund. But, it vary depends on your family budget and dependents. If you have parents who has the health problem, then you must have the more contingency fund.
Always contingency fund have the less return because of the liquid nature. So, if you have more than what you need for the contingency purposes, then it is waste of missing higher returns. In the same time if you have very less contingency fund then required for you, you would be in trouble. So, proper plan must there for the contingency fund.

Summary
I hope this article would have been more useful for the new investors to know the importance of the contingency fund.