CONTINGENCY FUND
- CONTINGENCY FUND
A CONTINGENCY FUND: WHAT IS IT AND HOW IMPORTANT IS IT?
Because life is unpredictable, surprises might happen at any time and take you off guard. Without planning for such circumstances, you not only find yourself in a terrible situation when it occurs but your future plans will also be derailed since you will be forced to either use up your funds or incur more debt. As a result, preparation for such a scenario is crucial and should be a key component of any financial goal planning.
Thus, a contingency fund is a collection of funds that might be in the form of cash or other liquid assets and is intended to be utilised to cover any unforeseen situations. Enhancing your financial security and safeguarding your financial plan in case of difficulties are the main goals. You can avoid taking out loans with excessive interest rates using the contingency as well.
WHAT ARE THE ADVANTAGES OF A CONTINGENCY FUND?
The three emergencies listed below may be covered by a reserve fund:
- Your contingency fund prevents you from incurring new debt.
- You can finance major emergencies with the aid of contingency funds.
- The use of contingency funds enables you to cover significant expenses that may arise.
To better comprehend these issues, let’s elaborate:
- YOUR CONTINGENCY FUND PREVENTS YOU FROM INCURRING DEBTS- You should use these savings to safeguard yourself from having to rely on credit to cover unforeseen monetary needs. You might have to service the interest and principal repayment for several years if you don’t always have huge sums of cash on hand and must take out a loan or use a credit card to cover such expenses. A bigger debt load may not only influence your daily life over the long run but also any future savings or investment goals you may have made. Therefore, having a contingency reserve can help you stop depending too heavily on debt.
- YOU CAN FINANCE MAJOR EMERGENCIES WITH THE AID OF CONTINGENCY FUNDS- You can fulfil emergency fund criteria with the aid of such a fund. You can continue to pay for your daily costs as well as your long-term financial goals, such as paying for your children’s education, a simple retirement, or taking that dream vacation. A contingency fund gives you the ability to handle significant cash emergency needs while minimising the impact on your capacity to continue paying your normal bills. Without such a fund, unexpected expenses like medical bills, natural disasters, property damage, etc. could have a disastrous impact on your finances. It could be tough for you to carry on with your daily activities, which could have negative effects.
- THE USE OF CONTINGENCY FUNDS ENABLES YOU TO COVER SIGNIFICANT EXPENSES THAT MAY ARISE- A contingency fund is crucial for more reasons than just meeting unforeseen cash needs. If you decide to quit your work or cease earning money from your main source of income, the fund may also be used to cover significant expenses. However, it’s crucial that you only use the contingency fund to cover such cash needs in emergency scenarios and refrain from using the funds for other purposes.
HOW TO START A CONTINGENCY FUND?
A contingency fund must be created based on your unique needs. The majority of financial gurus advise that you keep 2 to 6 years’ worth of income set aside in your contingency savings. These reserves provide financial security against unanticipated emergencies. Your funds don’t have to sit around doing anything. You can use the funds to invest in a product that provides strong returns while still putting your portfolio at low risk. CHIT FUND IS ONE SUCH VERY FEASIBLE OPTION.
WHAT ARE THE MISCONCEPTIONS SURROUNDING CONTINGENCY FUNDS
Some people believe that the money in the contingency fund is sitting around generating nothing. They could put money into gold, debt, or other assets like stock. Direct equity investments are risky, and debt investments are lengthy and frequently do not permit early withdrawals (unless without the imposition of fines), and gold prices are erratic. Purchasing liquid or ultra-short-term debt funds is a more dependable and profitable solution. These financing programmes are provided by Asset Management Companies (AMCs), which give you a higher interest rate than savings accounts
or fixed deposits while also minimising portfolio risks. Chit fund has comfortable features such as Ease of invest, suitable to your income vis-a-vis financial goal, less risk, and better returns.