My Life, My Decisions
                                                 (A Life Time Decision)

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The future depends on what we do in the present.                      ... Mahatma Gandhi

Contingency Fund:

Funds set aside for extraordinary or unexpected expenses resulting from a unscheduled occurance. This type of fund is called contingency fund/reserve, which is to the rescue of the individual in bad times or rainy days.The role of the contingency fund is to take care of individual's financial stability by creating a safety net to fill emergency needs. It can also be used to reduce the need to take out high-interest loans, such as credit cards, to cover unexpected expenses.


How much Coningency Fund is enough:

This fund becomes very important and some times critical for the salaried class people.Salaried individuals should make a provision of a minimum of 4-6 months expenses, i.e. in case of such emergency situation, 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. It may seem, somewhat strange , but the fact is when such situation comes, one understands the importance of the contingency fund. The other category ofcourse is the business class, who probably have enough assets, which may be liquidated in such situation.

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

It is always difficult to set aside substanial amount in one go partipularly when income is moderate.Moreover, it is also known ,when and how much funds would be required, as such it is recommended Emergency or Contingency fund must be planned . For proceeding with the build up of contingency fund, one can transfer a portion of monthly income/cash towards the continfency fund say 10-15% of income. Also, other gains such as receipt of any bonus amount, dividend amount, tax refund can also be diverted towards this account.

Investment options where one can park his funds for quick and easy redemption in emergency?

While, it is suggested , that contingency funds must be created for any unexpected happening, it is also suggested that money saved for this purpose , must be put in a scheme, that gives you better returns.
Depending on the corpus and the kind of liquidity required, one can consider options as mentioned below:

Sweep-in account:

If your contingency fund is more than Rs.50,000/- one can go for sweep in accounts. These accounts are an amalgamation of the features of a savings-current account and a fixed deposit account. Most of the banks, provide this option. It is suggested, that you must contact the individual bank and get complete details. After, getting the clarity of the scheme and terms, one can decide about his option.

Short term F.D.s:

If the size of your contingency fund is not much you can look at FDs or savings bank account. With the deregulation of rates on savings account, you can earn anywhere between 4-7%. Even FDs are a good option, but you may have to lose out on the interest component of pre-mature withdrawal.

Liquid Funds and Liquid Plus Funds:

If your contingency fund is over Rs 2 lakh, you cannot get the tax benefit of interest income up to Rs 10,000. In such cases you have no option but to invest in liquid or liquid plus funds.
They offer a post tax return of 7%. You can consider these for short term requirements such as 6 months to a year.


Conclusion :

Here you go!!, you just did your Contingent Funds Planning :).

You can decide on these schemes after proper uderstanding. Do not jump on any of the schemes unless you are satisfied. This is all the more important, if you are planning to put your money with private bank or any other such entity.

"Be careful of the cheats, they are every where and in any form. "

You may revisit the presentation (Future Value) given in the Saving page.



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