Guide to help you build contingency or emergency fund

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Guide to help you build contingency or emergency fund
Contingency fund recommended to be maintained without any falter time and again helps an individual to tide over uncalled for events such as medical exigencies, job loss or other such situations. Depending on your liabilities, income flow as well as monthly expenses, you need to maintain a corpus exclusively for the purpose.

How much amount shall suffice as emergency fund for different individuals?

Unless you have a substantial asset portfolio to your credit that can offer you liquidity in case of emergency as might be the case with business class you definitely need to maintain some corpus amount for emergency. Salaried individuals should park a minimum of 4-6 months while professionals who are self-employed and do not have certainty with regard to cash inflows should park an amount not less than monthly expenses for a one year time.

Should the emergency fund be created at one go or gradually?

Anything demanding a bulk amount has to be planned in advance, similarly the creation of an emergency or contingency has to be planned as well as needs a gradual process as any hard push for the same can impact other regular set financial goals.

For proceeding with the build up of contingency fund, you can transfer a portion of your monthly cash flow towards the fund say for instance 10-15%. Also, other gains such as receipt of any bonus amount, dividend amount, tax refund can also be diverted towards the account.

What are the different investment options where you can park the fund for quick and easy redemption on emergency?

As the prime purpose for which the emergency fund is created is to gain quick funds, the investment options that can provide you high liquidity together with some returns are not many. Indeed, on the basis of the corpus size that you consider to be sufficient to meet any exigency situation, you can park funds in different investment options.

For instance, if you have worked out an emergency fund that shall suffice in a case any exigency arises to be below you can park such funds in a saving account that can provide you a return in the range of 4-7%. In the case when the total emergency fund is over Rs. 1Lakh and less than Rs. 5 lakh, you can consider other bank accounts such as the sweep in account that is account with a mixed set of features of saving, current and term deposit acccount. With a return of about 6-7%, the proceeds of the account can be realized immediately. Other option to park in the capital chiefly to meet exigency situation is the short term debt funds.

For still higher contingency amount over Rs. 5 lakh, liquid funds can be chosen that invest in low-risk bearing money market instrument can be redeemed in a time not over 24 hours.

So, with consistent efforts on your part you should definitely make a kitty that without disturbing your other financial goals can help you meet any exigency situation without much stress.

Story first published: Tuesday, January 21, 2014, 14:27 [IST]
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