Risks are always present; from the moment we wake up to the moment we hit the sack, risks are always there and can strike anytime. Unless you are a time traveller or a real fortuneteller, there is no way anyone can predict when a risk will develop to an unfortunate event. Left unchecked, these events can debilitate us and leave us financially broken. Although they are unpredictable, we can always prepare for the worst that is yet to come financially. To equip ourselves with a financial safety net, we need to have a contingency plan in a form of savings.
What is a contingency fund?
A contingency fund is a form of readily available cash that can be used in times of emergency. And by emergency, we mean only in times of emergency. You should not use it to buy the latest smartphone. You should not use it to pay off your debts. You should not use it for purposes other than its intended use, which is during emergency situations. There are no exceptions for this one.
Since everyone is subject to financial challenges one way or another, having a contingency fund will serve as a cushion regardless of the situation. If a person is not financially prepared and a certain event occurs, he may be plunged into poverty and never recover at all.
Why save for a contingency fund?
Although the answers are obvious, having a certain amount that is accessible whenever you need it will allow you to make financial decisions in times of emergency. Among the risks that can strike you anytime are the following:
- Losing your job due to either economic or performance-related problems
- A debilitating injury or accident that can render you handicapped for months
- Accident or loss of lives among members of the family
- An occurrence of a natural disaster that will leave you financially powerless
- Unexpected situations such as lawsuits or collapse of investments
To be honest, there are countless risks out there, and all of them are merely hanging over your head every moment. Although the said incidents vary in terms of impact, people who are financially prepared to face the said challenges will overcome any emergency that will hit them. Meanwhile, people without emergency funds are more likely to accumulate debt because of the absence of ready funds when needed.
How much should one save for the contingency fund?
There is no specific amount as to how much you need to save for your emergency chest. However, most financial experts agree that your contingency fund should last for at least three months. This means that you have to multiply your current monthly expenses to the number of months you wish to cover with your emergency savings. Here is a sample computation of expenses:
Household A month expenses
- PhP 8,000.00 – Groceries and other food items
- PhP 2,000.00 – Electricity bill
- PhP 1,000.00 – Water bill
- PhP 1,000.00 – Internet bill
- PhP 2,000.00 – Child support
- PhP 1,000.00 – Credit card payment
- PhP 1,000.00 – Personal expenses
- PhP 15,000.00 – Total monthly expenses
If household A’s bread winner decides to keep a contingency fund that will last for 6 months, he has to multiply his total monthly expenses to the number of months he wants to stay afloat (in this case, PhP 15,000.00 x 6 = PhP 90,000.00). While some agree that saving for three to six months is enough, others suggest to go as far as a year for your emergency savings.
Where should you put your contingency fund?
When saving for unfortunate times, you need to make sure that your money goes to the right place. Ideally, you have to put your contingency fund to a place that is easily accessible yet yields interest while kept safely. Among the options you have are the following:
- Regular savings account that uses passbook instead of ATM
- Time deposit account that offers a minimum term of 30 days
- High-yield savings account with at least .5 percent interest per annum
Let’s face it: saving a few months in advance is a daunting task, since it will affect your monthly expenses tremendously. However, keep in mind that the payoff outweighs the effort. After all, people who are financially prepared during emergencies will emerge victorious from any contingency that can happen.