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Contingency Fund

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From where will you chip in funds if you encounter some emergency? A credit card can help you to the extent of the available credit limit and you can pay off the amount later. But it isn't easy if these emergencies come in succession. Also, the ability to pay your credit card dues is another question. Given the rising interest rate, it's definitely not the best option to revolve on your credit card. So irrespective of the fact that you have a mediclaim, a high limit credit card or dependable relatives/ friends, it's always to have your own contingency fund.

SIZE OF THE CONTINGENCY FUND:

If you are a salaried individual, your contingency fund should be equal to four to six months of your expenses. For example, if your monthly expenses work out to 15,000, ensure that you have access to liquid cash of 60,000-90,000 at any point of time. For a self-employed individual, this figure will in-crease to 1,20,000 as the cash flow is uncertain. Within self-employed individuals, there are professions like acting in which the variability of income is very high. Such individuals should provide for a minimum of one year, the experts say.

WHERE TO PARK THE MONEY:

The idea is to lock in your excess cash in an instrument which comes with an exit clause. If your contingency fund is less than a lakh of rupees, look at savings bank account. If your contingency fund is over a lakh to five lakh, you can look at sweep-in accounts. These accounts are an amalgamation of the features of a savings-current account and a fixed deposit account. If your contingency fund is over . 5 lakh, then you can look at liquid or liquid-plus funds. Liquid funds invest in low-risk instruments like money market funds. Most funds have a lock-in period of a maximum of three days to protect against and are redeemable within 24 hours. Irrespective of your salary, the need for a contingency fund is certainty. If you are yet to build one, start right away. Before that, ensure that you have lissquidity surplus of at least two months. Then you can gradually step up to build the kitty.

Happy Investing!!

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