One day, Mahesh loses his job on account of downsizing in his company. It takes him by compete surprise and with no severance package, Mahesh is left in a lurch. It takes him 6 months to get another job by which time he has already pulled out Rs 6 lacs from his equity investments, some of it at a loss. He is almost back to square one with respect to some of his goals. He is upset and distraught and realises his folly.

So where did he go wrong? Losing his job was not in his control but preparing for any eventuality was. Had he created a contingency fund of Rs 4 - 6 lacs, he would have been able to run his household without disturbing his investment bucket. Also mentally he would be prepared to use to money since it was meant for emergency situations. At least Mahesh had his investments to fall back on; imagine if he didn't have any.

Having a contingency fund and covering your risk through insurance are the two most important pillars for a good financial life. Investments come next, only after these two are taken care of.

While it seems quite simple to do, the tough part is that you really do not know how much will be sufficient unless you are in the habit of tracking your expenses. Remember, one need not plan for discretionary expenses such shopping, outings etc. because these can be controlled. A good idea would be to start tracking your monthly expenses into various categories such as fixed, variable - discretionary and variable - non discretionary. This exercise should be done for at least 2-3 months to get any kind of hold on your monthly expenses. Use a good money management tool such as Perfios to budget and track your expenses.

In Perfios, all your expenses whether incurred through your bank account or credit cards or even cash, can be categorised into different expenses heads which are pre-set. You have an option to add expense heads of your choice and you can either manually categorise the expenses or even use an auto - categorise facility where Perfios will automatically do it for you (wherever possible).

With this tool in hand, not only can you closely track and control your expenses, you can exactly know the expenses which you would have to incur despite any emergency or contingency situation. This would basically be fixed expenses such as EMI's, rent etc. and variable - non discretionary expenses such as household expenses, utilities, petrol etc.

If you know how much money you would require for the above, you can set up a contingency fund equal to 4-6 months of such expenses. While one month's expenses can be maintained in the bank account, the remaining can be held in liquid funds or short term fixed deposits. The details of your investments can also be maintained in Perfios for a ready reference.

A low contingency corpus may prove insufficient in an emergency and a high corpus indicates that your money is not being put to good use. Hence, a good grasp of your expense levels is necessary to know what the right amount should be. You may take a couple of months to build a contingency corpus but ensure that you recoup it to the extent it is exhausted in any situation.

So have you set up a contingency fund? If not, don't wait for a contingency to get you out of your slumber.

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