Contingency fund is the amount of money you keep aside for an unforeseen Situation like Job Loss , In this Article we will concentrate specifically on job loss only . It is generally the month you may require for 3-4 months . Considering you are the sole earner of the family , this is an important thing you must ponder upon .
Why it makes sense ?
With the global slowdown , there are many cases of unexpected job losses in the field of Finance , IT , Manufacturing and many others . You never know when you will be without job .
Lets take two scenario when you loose your job and you either had Contingency funds and you did not, Let us see what happens in these two cases .
Case 1 : You do not have contingency Funds :Put yourself in this Situation , Close your eyes and try to think about this situation , How do you feel ?
Your Family depends on you , all your family expenses are met with you salary , now you loose your job !! What if you don’t find another job soon ? In this situation you have a heavy pressure on you to anyhow find a new job as soon as possible , You need a JOB !! and not a “good” or “appropriate” or “Dream” JOB . If you find a job , but you don’t like it or wanted to do it .. still you will have to take it because of the pressure of “finding a JOB because of others depending on you” …
You compromise on Salary , Company and your wishes . Why does this happen ? This happens because you cant wait , because you don’t have the to survive of another 1-2-3 months. You know that you can wait a little more and find a good job suitable for you , but you cant wait .
Case 2 : You have Sufficient Contingency Funds : This case is just the opposite of what we discussed above . When you have sufficient CF , you have a relief in mind that you have sufficient time to find a good job without compromising your family needs. You dont feel the pressure to get the job ASAP . Though you have to find a good job soon , its not necessary that you take any shitty job which comes your way …
See this Video too …
Where to have Contingency funds ?
As per the name , it can be seen that this amount is required at the time of unforeseen situation which can happen anytime ,so it must be parked at some liquid avenue like Bank account or Liquid funds . If you are keeping 4 months of funds as CF , then you can keep 1 month money in Cash and rest 3 months money in Liquid funds .
Summary : Contingency Funds are the part of Risk management . And risk management is something no one should avoid. People realise its importance only when they plan for it and get trapped in a situation which demands Contingency funds . Plan for it .
{ 10 comments… read them below or add one }
May be it is too late to comment on this article but i am catching reading all the article i missed. These days in most of the family both husband n wife are working so i dont see the need to save for this fund more than one month salary incase. U think it is ok not to have CF if both are working ?
@Anu
Hmm.. yeah I would say if both are working then you can have 2 months of Expenses in Bank for Liquidity . The main idea is to have enough cash available to put food on your table for next 4-5 months even if you loose your job . So the worst case will come only when both the people loose the job .
Manish
I have just started reading up articles on this site, so adding my comment quite late!
I would just like to add that even if both the partners are working, personally I think it is very essential to keep aside a contingency fund. Sometimes really unexpected things do happen (much beyond our control) and then this fund would be …. you will just be thankful that you kept it. So while you always hope for the best, be prepared for the worst also.
Vidya
Yea .. emergency funds should be created anyways
Manish
There are two important things which should be considered for CF first one is liquidity and second one that they will be able to cope up with inflation based on these which type of (mutual) fund will be suitable for CF.
Apart from this for a government employee whose job security more or less is not an issue how much CF should be required?
Neelesh
Neelesh
I would put bigger stress on the liquidity front as its the main thing in CF . For seniors , a higher CF is required , i would say 1 yr
Manish
Hi Manish,
I want to build a contingency fund of about Rs 1 lac. i shall accumulate this amount as and when i am able to save it. At present i am having 10000 to start with. I was looking to invest this amount in a liquid fund. can u suggest me a good fund wherein i can invest as and when i want ?
Regards
Hitesh
I think first you accumulate 1 lac, how much time will you take to accumulate it , if its less than 6 months , then better keep it in bank account itself and then in lumpsum out it in liquid fund or wherever, it would be less hassle and no major left out on returns .
Manish
Hi Manish,
I have accumulated 75K as part of CF. Now i want to park these in liquid funds,where i can get little extra returns than in savings account.
Do you have any suggestions on how to select a best liquid mutual fund?
any other suggestions are welcome.
Veman
HDFC liquid funds is a good one .
Manish