Your Money: Have you created a contingency fund?

Published: June 19, 2020 2:40 AM

An emergency fund that can take care of your basic household expenses for six months is as essential as food, clothing and shelter.

It is time we look at creating contingency fund as our primary objective from our income and savings. It is time we look at creating contingency fund as our primary objective from our income and savings.

By Harshad Chetanwala

‘Roti, Kaapda aur Makaan’ would be one of the most famous slogans in India. The slogan was coined to highlight the basic necessities of human beings, i.e., food, clothing and shelter. All of us work hard over the years to ensure these basic necessities are always available for us, the quality of these necessities may vary depending on factors like income, profession, wealth, habits, society, etc.

Difficult times
The difficult times caused by Covid-19 has started challenging the comfort of our basic necessities which we have built with the help of our steady income and economic growth of the country. A lot of people are staring at business losses, salary cuts and unemployment across the world and in India, because no one ever would have prepared for tough times like these where the world would literally come to a grinding halt for weeks and months.

At the same time, we need to see if there are any positives in this situation that we can learn from. One such learning from the personal finance perspective is the importance of having a contingency fund.The significance of having a contingency fund in place has never been more important, as reflected by our current times. A contingency fund is therefore the creation of a savings pool to take care of such unforeseen circumstances. The concept of contingency fund is not unknown or new; it probably did not get right attention from us earlier. There are people already facing or are worried about a potential financial crunch due to the impact of Covid-19. This situation has set a strong example for us to look at contingency fund as a necessity just like food, clothing and shelter.

Importance of contingency fund
Irrespective of what we do for a living, where we work and how much we earn; every one of us may be faced with a financial emergency at some point of time. No one can be certain about when, how and what the impact of that emergency would be but having an appropriate contingency fund in place will reduce the impact of such emergency and help us sail through it. It is evident that those who had kept some of their savings aside as contingency fund are able to see through challenges in a better way than those who did not save. It is this sacred money that comes to our rescue when profits, income or wages dries out or goes through difficult phases.

It is time we look at creating contingency fund as our primary objective from our income and savings. The strategy is to keep aside the saved money after taking care of mandatory expenses in a bank account or liquid funds until the balance of that account reaches six months of household expenses. The number of months of household expenses saved as contingency fund depends on the financial strength and lifestyle of an individual. However, a provision for six months of household expenses can be extremely useful in an emergency and more importantly, add to peace of mind.

It is now elementary that we add contingency fund along other basic necessities, because it keeps our family reasonably secured during a crisis and also empowers us to combat Covid-19-like situations without disrupting our Roti, Kaapda and Makaan.

The writer is co-founder, mywealthgrowth.com

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