The fundamentals of building a contingency fund

You can never be too careful about your finances and you’ll know why if you have ever faced an emergency and had no contingency fund in place. These words are not to cause you to worry but only encourage to plan for contingencies or, in other words, emergency expenses ahead of time. After all, life is full of uncertainties. So, planning for them beforehand rather than waiting for the end moment is a smart move.

Want instances? Cool, since you asked. Look at the current scenario, what a curveball life has thrown at us‑COVID-19. Imagine millions of people are affected by the coronavirus pandemic and most of the world is locked-down in their homes. While you may have survived March with February’s salary, what about April and the months that follow, do you have a plan? God forbid, if you are one among the masses who have to put through pay cuts or worse, will your income be sufficient to stay afloat through this month? Ponder over it and reflect.

The outbreak of COVID-19 is one of the many unpredicted events that life can throw at you. So, unless you want to live at the mercy of lemons that life directs at you, build an emergency fund to stay afloat during difficult times. If you have some bucks saved to your name, well and good! If not, it is never too late to start afresh. Nevertheless, it is no guarantee that an emergency fund would help you address an unexpected event like a pro but it can decrease the level of unpleasantness. Getting the hang of it? Good!

So, here’s a guide on the essentials of a contingency fund to help you get started with your emergency fund planning or even boost it if you possess one.

Contingency fund meaning
An emergency or contingency fund is the money or a portion of your monthly income that set aside regularly to address unexpected events. As mentioned, an emergency can take any form such as a critical medical treatment, drainage system breakdown, and a loss of job. While we are at identifying what qualifies an unexpected event, let us be very clear, an unplanned expense such as shopping on a tempting offer is not an emergency. If even now, you find yourself at crossroads, its time you make tough but right decisions.

When should you start a contingency fund?
The answer is simple, as soon as you start receiving an income. There’s no better time. But if you have been earning for quite some time, now is the right time to start a contingency reserve. The answer changes if you have been earning for a while now but a debt to repay. In this case, your course of action should be to build a starter emergency fund for repayment purposes and gradually increase your contribution to the primary contingency fund.

Calculating emergency fund
While experts suggest building an emergency fund that equals 3–6 times your monthly living expenses, how much you need to contribute also depends on other factors. Read them and a lot more here. Continue reading here.