Hyderabad: Many unexpected things in life. None can tell when an emergency will strike. In many cases, we feel sick and need to be admitted to the hospital. Although this is important, many other financial constraints may come as a hurdle. Hence, we must be prepared for all such emergencies. Some cash should always be kept ready to cover it all. This contingency fund will rescue us in difficult times.
When a financial emergency strikes, it will leave a huge impact. If we are not prepared in advance, it will drain our savings and investments. This sometimes involves the risk of loss of income as well as principal. Also, our key financial goals may be hampered. A sound financial plan includes an adequate contingency fund. Take precautions for its efficient management.
Your contingency fund should have an amount sufficient for at least 6 months of household expenses and loan instalments. It should be sufficient during this period when you have no income at all. In times of recession, this fund should be increased so as to meet your overall expenses for 12 months. It should be calculated based on how much you will need for essentials, house rent, children's fees, EMIs, vehicle expenses, other bills, etc.
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Review your contingency fund from time to time. It should be flexible enough to accommodate your changing lifestyles and expenses. These days, living expenses are increasing by leaps and bounds. Your never know what additional personal expenses would arise suddenly.
Make sure that an emergency fund is always readily available to withdraw. Keep this fund in bank fixed deposits, liquid funds and high interest paying savings accounts. This makes it possible to borrow money immediately when needed. At the same time, there is scope to earn some income. There is a lot of resilience to inflation.
Change the size of your emergency fund based on your changing financial responsibilities. For example, if you take a loan, the contingency fund should be equal to the amount of instalments. This fund can be reduced after the loan repayment is completed. Do not deposit emergency fund in schemes which have a lock-in period and cannot be converted into cash immediately.
Use an emergency fund as a last resort. It should be used only when there is no other means to meet daily financial needs. It is not a permanent solution but just a temporary relief arranged to overcome financial difficulties. This fund should not be used for wasteful expenditure. It should be reinstated as soon as conditions improve.
Contingency fund should be used only for family needs, health emergencies, personal expenses, repayment of loan instalments etc. Inform spouse and other family members. Corona has taught us many valuable economic lessons. Emergencies always begin with little warning. All we have to do is always be adequately prepared.
