How To Build Your Contingency Fund?
Following are some tips which can help you in building and managing your Emergency Fund:
Ask your advisor: Your emergency fund must be sufficient to meet emergencies. Contact your financial advisor and give him the details of your fixed and variable monthly incomes and expenses, including EMIs, leisure, medical expenses, credit card payments, etc. He will help you in determining the amount you need to keep aside for emergencies. He will also guide you with respect to the assets you should invest in, as an emergency fund will serve its purpose only if can be liquidated easily in case of an emergency.
Keep it separate: You must always keep your emergency fund isolated from your normal savings account. This will help you curb the temptation to withdraw your emergency fund for your usual or recreational expenses. An emergency fund is supposed to meet emergencies only, it should not be used on new clothes, vacations, casinos, etc. Because if you use it now, you will not be left with anything then.
Cut down the unnecessary expenses: If you feel you are not left with enough money after your monthly expenses and other investment commitments, and hence you cannot start investing for an emergency fund.
Think again! Yes you can, there are many things you spend on every month, time and again, which you don't even require. The expensive shoes and clothes you buy, which you seldom wear, the gold and silver you buy only to stack in your locker, and the like can be exchanged with bringing in mental peace and stability into your life.
Use unusual income: Most people plan to buy the latest gadget or go for a vacation when they are expecting their annual bonus, or a sudden gain, or sale proceeds from old furniture or other household
items. But you as an investor must set priorities, and providing for emergencies would definitely occupy a higher position than purchasing the latest 55 inch LED TV. So, use your next bonus in contributing to your emergency fund.
Invest Regularly: Like your other monthly installments of expenses and investments, make it a habit to invest for your contingency fund regularly. You must keep aside a fixed sum from your monthly income dedicated towards emergency. This is a good approach as you may not be getting big surprise money any soon or you may not have lump sum money to invest plus it builds discipline in saving and investing.
So, the bottomline is reach your advisor and build an emergency fund. Remember it is an 'Emergency' Fund and shouldn't be touched unless an emergency happens. Follow the above, with discipline, perseverance and a little extra commitment, you can protect yourself and your family from the unlooked-for emergencies. The emergency might not happen in the next twenty years, but when it does, you'll be happy to look back that you took this decision this day. Remember your family's future is dependant on you.