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Jul 16, 2012, 12.28 PM IST
A contingency fund will come in handy in a crisis and anyone can sail through difficult times if they have readied themselves for it
The perception of risk varies from one person to another. There are some who do not have any problem in taking risks in life, business or investments. And there are those who are completely risk-averse that is those who prefer to stay as far as possible from risky ventures. Then there are those who like to mix safety with risk.
While one venture may be risky for an individual, the same venture may be safe for some other person. But to be prepared for it is a different ball game all together. One never knows what difficulty is awaiting him at the next turn of life. It’s said that it never rains, it pours.
The most recent example which most of us can relate to is the global recession. Although India was not as affected as other countries, people did feel the pinch of the financial meltdown.
Almost all companies cut their costs, didn’t hike salaries, bonuses were either less or none, less global demands. The job market was in a sorry state.
There was a freeze on hiring too. In a situation like this, losing a job is the last thing anyone would want. Every-one must be prepared for such eventualities. The best thing possible is risk management.
Two steps generally involved in risk management are contingency planning (emergency planning) and insurance planning.
This is the first step in risk management and also the first step in building a sound financial plan for any individual. Once a person’s risks are covered, he can safely plan for his goals. If risks are not covered and he plans for his goals of life right away, then all of his savings accumulated to meet the goals will get wiped out if any untoward incident occurs.
Contingency planning can well be termed as saving for a rainy day. It is planning for any emergency that might be lurking round the corner. A contingency fund or emergency fund has to be prepared to meet any emergency. Predicting how much would be enough for such situations is always difficult.
How to calculate a contingency plan?
Each one of us prepares a monthly budget wherein we list the items and the expenses against them. From the list of expenses, a person needs to distinguish them as mandatory expenses and voluntary expenses. Mandatory expenses are those that are supposed to be met ‘come what may’. EMIs, insurance premium, grocery and utility bills, etc fall under this category. Voluntary expenses are those which can be avoided during bad times. Going on a vacation, eating out or going for movies fall in this category.
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