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Importance of maintaining a contingency fund

Importance of maintaining a contingency fund

  • By Saral Credit
  • May 27, 2022

Life is uncertain and no matter how steady you feel you are, a financial crisis can leave a big impact on your personal finances and throw your future plans off gear. While this is not to say that you should have a pessimistic outlook towards life, being prepared for a financial crisis can indeed help in more ways than one. In fact, if you have your feet planted firmly on the ground, as far as your finances are concerned you can weather any storm! Here are some tips that you can use to plan for a financial crisis.

Begin with a budget :The first step towards getting a hold over your finances is making a budget. If you do not have a budget to live by chances are you are overspending and have even taken on excessive debt. For instance, you may have taken a personal loan to purchase one or more gadgets, just because you were taken in by attractive personal interest rates. While a budget cannot things magically, it is useful tool to determine where you stand financially. It will also be an indicator of where your funds are being directed. While you have to fulfil existing debt obligations including your personal loan like the one mentioned above, there are indeed other places where you can cut corners. For instance, if you have a subscription for a magazine that your hardly read or going out with friends almost every weekend, you know for certain that these are surplus expenses that you can do without. Making these small changes in your daily financial habits can make a big difference to your finances and even ensure that you do not find a place in the loan defaulter list of a bank.

Create an emergency fund :Once you have a hold over your finances with a budget, it is time to create a contingency fund to last you at least 6 months to a year in case of any financial crisis. These funds should be enough to help you meet all your regular expenses for the above mentioned time frame. Instead of leaving these funds idle in a savings account, you can consider investing in a liquid fund that provide a higher rate of interest and also provide you the required liquidity to withdraw funds in the face of a crisis. The greatest advantage of creating and replenishing your emergency fund periodically is that you will not have to worry about fulfilling your debt obligations even in the face of crisis and live in fear of ending up on the loan defaulter list. Maintain a good credit score Your credit score is a barometer of your financial health. If you have a good credit score, you not only feel in better control of your finances, you also enhance your chances of obtaining a line of credit when you are in most need of it. There are instances in life, where despite your best attempts to remain prepared you are faced with a sudden financial crunch. At times such as these, a quick loan at attractive personal loan interest rates will come handy if you maintain a good credit profile. You can maintain a good credit score, by simply making it a point to make timely repayments on your existing lines of credit and maintaining a good balance between secured and unsecured credit. Too many unsecured lines of credit such as personal loans and credit cards may be detrimental to your credit health.

Look for an extra stream of income : Last, but not the least, if you have a talent or a knack that you know you are not making the most of, use it to earn a extra income. For instance, you can take up work are a freelance graphic designer or website developer if you are really good at it for making that extra bit of income that you can use to beef up your emergency fund. With the explosion of social networks and the expanding need of digital content for professionals procuring these extra jobs is a tad easier in this day and age.