You never know when an emergency will hit you. Emergencies like a huge medical bill payment or expenses during a period of unemployment etc. are not situations that seem vague in these trying times. But if you are a prudent investor and save money wisely, then you will be able to float over these situations.
What is a contingency fund?
Contingency is a fund that is kept aside for future emergencies. It should not be confused for occasional needs for excess cash for reasons such as gifting or a sudden break down of an electronic appliance etc.
Why is it necessary?
During emergencies, you may need to use up some amount of cash. If you invested your money into assets, it is obvious that liquidating such assets may take some time, which might not be made available to you. Opting a personal loan may cost you interest rates of about 18-22% and getting into a loan may not be easy made available at the time when you require.
How much is enough?
You contingency fund should be so much that it will be help you cover your monthly expenses, along with regular contributions that you make towards any investments and instalments for any loans that you repaying. Bare it in mind, it is very important to accurately list out your expenses so that you can benefit from your contingency fund.
Where should you keep?
Park your contingencies where you can convert them easily both in terms of time and money. That means , without a heavy penalty imposed on you, you can withdraw the funds as and when required. Do not leave them idle by keeping at home, instead try saving in your Savings Bank account., where in you will be entitled to 3.5% per annum. Stashing away in sweep – in accounts or flexi deposits, which let the excess in your account earn a fixed deposit rate. Short term funds and liquid funds are also good options. These can be converted into cash within 48-72 hours.