Advantages of Contingency Fund

 

Advantages of Contingency Fund

Contingency Fund (Emergency) is the excellent concept in personal finance. But still many people don’t understand what is it and why is it so important?

Well, Contingency fund means the emergency fund means this is the fund that you can use in case of emergencies such as a Job loss, medical emergencies…etc..

Why to have Contingency Fund?

Many people argue that, what is the need of emergency fund? After all, we invest lots of money so what is the need of contingency fund? Well, the main purpose of having an emergency fund is that, during the time of emergency, you don’t have to liquidate your long term investments.

Say for Example, you have build a portfolio of mutual funds than in case of emergency, you don’t have to liquidate your this long term investment.

Contingency fund basically protects your long term investments being liquidated.

Is Credit Card Contingency Fund?

No. Your credit card is not your contingency fund. And if you think that it is your emergency fund than its your biggest mistake. Ideally emergency fund should be in your savings account or in short term debt funds so that in case of emergency you can easily withdraw it.

I personally advise people to replace all of your credit cards with debit cards.

Is Brother-in law’s birthday an Emergency?

NOPE. It’s not the emergency. Many people keep the contingency fund with them but they don’t clearly define the emergency. It’s your brother-in law’s birthday and you need some urgent cash – it’s not the emergency. The Emergency should be like medical emergencies and job loss, accident, disability…etc…

So build your own emergency fund. This will act as a cushion in case of emergencies.