Contingency Fund – Emergency Money Planning

Introduction

Before you invest a single Rupee for wealth creation (stocks/mutual funds), you must secure your present. A Contingency Fund (or Emergency Fund) is a pool of money set aside specifically to handle unforeseen financial shocks like a job loss, medical emergency, or sudden major repair. It is the "Airbag" of your financial car.

Why do you need it?

1. Job Loss: In a volatile economy, finding a new job can take 3-6 months. This fund pays your EMI and grocery bills during that period.
2. Medical Crisis: Even with health insurance, there are non-payable deductions or immediate cash requirements before cashless approval.
3. Prevents Debt: Without this fund, you would be forced to swipe a credit card (at 40% interest) or take a personal loan during a crisis.
4. Protects Investments: It ensures you don't have to sell your long-term equity investments (possibly at a loss) to fund a short-term emergency.

How much is enough?

The standard Rule of Thumb: 3 to 6 months of "Essential Living Expenses"

Calculation:

• Rent/EMI: ₹25,000
• Food/Utilities: ₹15,000
• School Fees: ₹5,000
• Insurance Premiums: ₹5,000
• Total Monthly Expense: ₹50,000
• Required Corpus: ₹50,000 x 6 months = ₹3 Lakhs.

(Note: If you have dependants or an unstable job, aim for 12 months).

Where to park this money?

The goal of this money is Liquidity and Safety, NOT Returns. Do not put this in the stock market!

1. Liquid Mutual Funds

• Why: Can be redeemed in T+1 day (or instantly up to ₹50k/day via Insta-Redemption).
• Return: Better than Savings Account (~6-7%).
• Risk: Very Low.

2. Sweep-in Savings Account

• Why: Instant access via ATM.
• Return: Earns FD rates.

3. Review

• Do not lock this in a 5-year FD or PPF.
• Do not put this in Equity Funds (Market might crash exactly when you lose your job).

Exam Notes: Writing the Answer

Question: "What is a Contingency Fund? How should it be deployed?" (10 Marks)

Model Answer:

Definition: A Contingency Fund is an emergency reserve created to meet unexpected financial exigencies such as loss of employment, medical emergencies, or urgent repairs. It is the first pillar of financial planning.

Quantum: Ideally, it should cover 3 to 6 months of mandatory household expenses (including EMIs and insurance premiums).

Deployment Strategy: Since the priority is Liquidity and Capital Protection, this corpus should be invested in:

1. Liquid Mutual Funds: For T+1 day access and better tax-adjusted returns.
2. Savings Bank Account: For immediate ATM access.

Importance: It acts as a financial buffer, preventing the investor from breaking long-term investments or falling into a debt trap during a crisis.

Summary

• First Step: Build this BEFORE starting SIPs.
• Size: 6 x Monthly Expenses.
• Vehicle: Liquid Funds or High-Yield Savings Account.
• Usage: ONLY for emergencies. Not for buying an iPhone!

Quiz Time! 🎯

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