Staying jobless for an extended period, having to spend heavily on a health emergency or facing any other obstacles can peg you back in life. Not so when you have a contingency fund in place to take you through should you face such times.
In the era of instant gratification, many of us are ignoring savings and investments. Be it when buying high-end mobiles during the festive season or any other time of the year, we cross our spending limits and face the mess. It’s just that the realisation comes later. Better be prepared than sorry!
We at zarooribaathai.in can help you create a contingency fund with this guide. Let’s read on!
Contingency Fund Meaning
The contingency fund is meant by the savings reserve you build to deal with unforeseen circumstances such as the loss of income while you stay jobless, the heavy medical expenditure and alike. These situations often lead individuals to a debt trap they find hard to get out of. A contingency fund thus helps overcome the financial burden one may face in such times.
How to Build a Contingency Fund?
Building a contingency fund requires discipline and attention to detail. The fund creation process will also depend on the life stage you are at. We will discuss all that and more here.
Set Your Monthly Goal and Stick to it
Save at least 10-20% from your salary every month to build your contingency fund amount. If you have just started your professional life, do it from the first salary itself. In case you have spent around 5-10 years of your corporate life but have not saved for those potentially harsh times, save around 20-30%. Your salary must have been substantially higher compared to when you began your professional journey. By raising the cap to 20-30% from the usual 10-15% that most do, you make up for the years you didn’t save. Stick to the savings target month-on-month. In case your income allows you space for more savings, go ahead and do that. This will only raise your contingency fund.
Open a Separate Bank Account for Keeping Contingency Fund Amounts
There’s a possibility that the savings you build for contingency times may get consumed by having all your money in one bank account. Open a separate savings bank account and transfer your savings to it every month. This will ensure the contingency reserves are not used for usual monthly expenses. You can even look to put your money in recurring deposits every month and earn at an interest rate of 7-8% per annum if you invest there for 3-5 years.
Don’t Use Credit Cards for Unnecessary Purchases
A credit card is a delight and can be a hassle at the same time. Using it diligently will earn you rewards and cashback to boost your savings. Otherwise, if you spend too much without any thought, the bill will rise significantly higher, preventing you from paying all at once. That’s when banks charge interest at 30-45% per annum. Failing to pay the entire dues month after month will only mount financial concerns for you. So, check your income, see the savings you need to make monthly, and be selective while purchasing with a credit card. You will be home!
Leverage the Power of Insurance
Life obstacles such as a health emergency can hit you hard financially as healthcare services are getting costlier by 10-15% every year. With no health insurance coverage, you will be bound to take a medical loan to bear expenses. In return, you will need to pay interest at around 13-20% per annum. Why pay that when you can get high health insurance coverage for an affordable premium, more so when you are in your early 20s? Health insurance is better than a medical loan and can prevent you from consuming your contingency fund. However, choose a health insurance policy that covers a maximum of illnesses so that you don’t have to take a loan for healthcare.
Conclusion
Being prepared for financial obstacles with a contingency fund beforehand is critical to feel assured when they do occur in your life. If you have not started building a contingency corpus, start doing it taking cues from this guide. From all of us at zarooribaathai.in, we bid goodbye for now. We will come up with another engaging story. Stay connected!
