Contingency Fund—A good strategy to tide over financial crisis

​Some of the export-oriented industries such as IT and pharmaceutical industries are currently undergoing some pains due to the wave of protectionism in the US under the Trump regime.

Jun 04, 2017 03:06 IST India Infoline News Service

Some of the export-oriented industries such as IT and pharmaceutical industries are currently undergoing some pains due to the wave of protectionism in the US under the Trump regime. The IT industry especially is facing the brunt and there are talks of massive lay-offs proposed by the IT companies. When a person loses a job, he is at a loss to know what to do next. He is worried that the if he does not get a job soon enough, he may have to face financial difficulties. He reviews his financial situation, that is, cash in hand, bank balances, short-term and long-term investments vis-à-vis his monthly outgo on day-to-day household expenses and liabilities such as premiums of life and medical insurance, repayments of home loan, personal loan, car loan, and so on. The prospect of not having regular monthly income to meet all these expenses and liabilities is quite bothersome and even frightening.

One needs to be prepared well in advance to face the contingency of loss of job or medical emergency. It is good to know that a contingency fund is a well-planned strategy to tide over such difficult times. To anticipate such a financial crisis and be prepared for the worst is what the contingency fund is all about. To create an adequate amount as contingency fund, one needs to estimate the amount required to meet all household expenses and financial liabilities for a period of six months to a year, assuming that in the case of job loss, the person would be able to secure a new job within six months to a year.

However, loss of employment is not the only reason to create a contingency fund. Such a fund can be utilised for a medical emergency or for managing the financial situation in the event of an unexpected financial loss. One must remember that contingency fund is not meant to be utilised for buying luxury items or funding holiday tours. It is to be utilised for meeting day-to-day expenses and discharging financial obligations (liabilities) during a financial emergency.

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