What’s this “Saving for a Rainy Day” mean which you would have heard umpteenth times?
HOW MUCH FUND SHOULD BE KEPT FOR EMERGENCIES???
Unless the situation actually occurs or arises, one can never be sure of the amount you require in a Contingency Fund.
But, to be absolutely safe and secure, Financial Planners, normally recommend that you need to have 4 to 6 months of your monthly expenses kept aside as Contingency Fund. Since, not many are comfortable with this big chunk of money kept blocked, I normally recommend anywhere between minimum of 2 to 4 months of Monthly expenses as Contingency Fund.
This amount of Contingency Fund could vary depending on our job profile, your Family structure (joint/nuclear).
WHERE TO KEEP THE CONTINGENCY FUND?
The Contingency Fund should be easily accessible. It is encouraged that your Spouse/Life Partner knows about these funds and how to access these funds.
Contingency Fund could be parked in form of Savings Bank Account, Bank Overdraft facility, Liquid Funds with Mutual Funds.
The Primary purpose of a Contingency Fund is the Preservation of Capital and returns should be treated as Bonus, nothing else!
I would recommend that you split your Contingency Fund into
30% in SB Account
30% in Flexi Deposits
30% in Liquid Mutual Funds
10% in Arbitrage Fund (yes, I know, I am creating a bit of controversy here.......).
Why Arbitrage Fund?
Yes, it is quite unlikely that you will be using your entire 6 months of Contingency fund in one go.
And, even if yes, the Contingency could be either 1 month away or even 10 years away (or if you very lucky), could never happen!.
And, emergencies come in all forms and there are some kind of emergencies which allows you the luxury of arranging funds after a few days.
But, do remember, having a Contingency Fund, is purely for a Contingency and if you earning anything out it, it should be treated as a Bonus only!
Keep your Contingency Fund untouched. Remember it is for CONTINGENCY and not a Reserve Fund for you to dip into every now and then.
I have seen many Investors dipping into Contingency Fund of make up for shortfall in some other goal (mostly short term), which is very unhealthy.
Most importantly, do not forget to have your Contingency Fund backed by Adequate Insurance. Do remember, a Contingency Fund goes hand in hand with a Term Plan Cover and a Health and Accident Insurance Cover.
So, with a Contingency Fund in place which acts as a cushion in case of a Financial Emergency, you can now concentrate on your building your Financial Moat.
Best of luck,
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