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Contingency fund in a financial plan

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Contingency/liquidity margin:

Liquidity margin, typically, is to take care of expenses, if there is an income disruption.

Typically, one should have about three months of expenses, as a margin. As per the case, it could be higher or lower.

This should be maintained in the bank (savings bank account or flexi deposit) and in ultra short-term debt funds, so that one can access it when needed. three months of expenses, as a margin. As per the case, it could be higher or lower.


This should be maintained in the bank (savings bank account or flexi deposit) and in ultra short-term debt funds, so that one can access it when needed. Contingency margin is to take care of all situations that one cannot envisage.

Sometimes it is for situations, which are known, but the timing is not known.

Medical cover: The young think that nothing can go wrong with them, they being so fit and sprightly.

There is no assurance of that too. A 29 year old person in my association, who was apparently in great health, passed away due to a heart

The young think that nothing can go wrong with them, they being so fit and sprightly.

There is no assurance of that too. A 29 year old person in my association, who was apparently in great health, passed away due to a heart attack. Karan told me, he had a Rs 2 lakh cover from his company.

That is woefully inadequate for a family of three.

Also, one's medical expenses alone are not the only area of concern. The concern areas also extends to one's parents and other relatives whom one needs to bail out when they fall ill. That is what had happened to Karan.

Life insurance: A lifestyle is built based on the income that one has. Good income earners have a lifestyle to match. That is why we find that even those who earn well, sometimes struggle, when it comes to their expenses. Their goals also tend to be gilt edged. Now, what will happen, if that income stops? Absolute disaster! Everyone who has dependants need to have a cover that can cover their dependants expenses and meet their upcoming goals. But then, you need to have a good cover for that. I estimated that Karan needs Rs 3.5 crore of insurance. He had all of Rs 7.5 lakh. Term plans are available at very low cost today. One should take advantage of it.

Savings: Income, less expenses, is not savings. Income, less savings, should be expenses. That is a more disciplined way to go about ensuring that the future goals are not held hostage to today's extravagant tendencies. Savings also should be well balanced. Invest wisely across asset classes. No point running scared of equity based assets, just looking at their volatility. In the long term, their returns are better than any other asset class. If you want inflation-adjusted positive returns, you cannot escape this. Give it enough time and it will show results.

 
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