What is Contingency Fund & Why is it Important?

Many of you have never heard about the word “Contingency Fund”. Well, In Layman’s language, Contingency Fund means “Emergency Fund”.

Emergency Fund is very important because it protects your assets and long term investments during the time of emergency.

Why Contingency Fund is Important?

Most of the people don’t know the concept of having contingency fund and those who understand this concept don’t take action on it. Well, See. Not having Emergency Fund means during the time of Emergency (Medical Illness, Sudden Death, Accident & Disability, Job Loss..etc..), you will have to liquidate your long term investments (If you have any) to fuel your basic life style and by doing this, you have to compromise with your long term wealth.

And on the top of this, if you have never done any Investments than you have to borrow money (Debt) to fuel your life style. And you have to go in such a deep debt that you can’s stop working for the rest of your life.

And this is why Emergency Fund is Necessary.

How Much Contingency Fund Should you Have?

Well, This depends on your life style and how much you spend every month to maintain your life style. Ideally you should have at least 6 months of Contingency Fund and 1 year is the Best. Say for Example if your monthly expense is $ 2000 than your Contingency fund should be $ 12,000 to $ 24,000.

What is not the Emergency?

Many people simply can’t define what is emergency. Your Brother-in-law is getting married so you need some cash to buy new clothes is not the Emergency. Several of my friends define emergency as wife’s birthday. And that’s why they struggle financially.

One of my high status friend love to spend lots of money on her wife’s birthday behind those things which will never pay him any Passive Income, Dividends & Capital Gains. Well, These are not the emergencies.

Thus, Before starting Investing, Build the Contingency Fund, Than Get out of Debt & finally start investing your money…!!!!