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23 June 2020 | 3 min read

Contingency Fund: What It Is And Why It Matters

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Disaster can {and mostly} strikes unannounced. And often, these disasters are money-related. An accident, unexpected travel requirements or simply purchasing a new expensive gadget in case your old one breaks down. How do you deal with such situations? A smart answer is drawing out money from your contingency/emergency fund.

And if you haven’t already done the intelligent deed of creating a contingency fund, now is precisely the time when you should. 

Definition Of Contingency Fund 

The textbook definition of contingency fund says ‘a pool of money put away for unforeseen circumstances’. And that’s exactly what a contingency fund is all about. Financial experts peg contingency funds as an essential cushion you can fall back on if an unfortunate incident happens. 

Ideally, your contingency fund should have a minimum of 3-6 months worth of your living expenses kept in a separate account. This money should not be used for your daily or extravagant shopping but for events that count as an emergency. Moreover, the asset you save in your contingency fund should be liquid or could be liquified easily. For instance, you own a car or home, and that accounts as your asset but selling them to save you from an emergency is not only inconvenient but out of the question. Thus, your Contingency Fund should be easily accessible. 

At digibank, setting up the contingency fund portfolio is super easy, and it’s all done online. In fact, with our app, you can book your fixed deposit in three easy steps.

  1. Login to the digibank app – you can download the app here
  2. Tap ‘Open New Deposit’ & Select ‘Fixed Deposit’ or ‘Recurring Deposit’
  3. Choose tenure of 1 year for 6.25% interest – that’s it, and you are done.

Why Does It Matter? 

We have answered the ‘what’, which leaves with the ‘why’. Why should anyone be concerned with a contingency fund? The simple answer is to uphold your dignity and sense of self on your ‘Rainy Days’. Yes, there is no harm in asking for help from your kin and close friends but wouldn’t you be better off if you were able to use your own money to take care of emergencies. Moreover, any money borrowed has to be returned, and that puts a little stress on our mental peace. 

Secondly, a contingency fund provides a bedrock for people depending on you. Be it your parents, spouse, children or even friends. They might get in an unforeseen accident or situation where they need the money, and if you have a contingency fund, you can always bail them out. 

The third most evident and smart reason for building a contingency fund is a job loss or as the pandemic showed us, pay cuts and being furloughed. The last two scenarios were hardly anyone’s concern, but with the lockdown and crippling economy due to the novel Coronavirus, we now know anything is a possibility. And in such situations, your contingency fund gives you a sense of freedom. This allows you not to make poor career choices, take a job with a lower salary bracket or opt for an unhappy make-shift job arrangement. All of this can be avoided when you have money to fall back on. And give you the luxury of time to look for an opportunity that does justice to your profile and calibre. 

Last but certainly not the least, contingency funds are perfect for handling unexpected expenses like home or vehicle repairs and immediate travel plans to visit a sick relative or help one of your friends settle in a new job abroad. On the happier side, marriages of your friends could also be another reason why you have to travel unexpectedly and with gifts and cloth shopping to do, your plane tickets should not be a cause of fear. 

Financially independence doesn’t come from living paycheque to paycheque, and it comes from actively making smart investment choices, having insurance policies in place and creating contingency funds for hard times that you might face in the future. 

by Priya Chaudhary
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