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Faizan
Risks are an inherent part of life. While planning effectively mitigates a certain degree of risk, it can never completely eliminate it. Risk and uncertainty characterize the business environment and organizations assume various risk reduction methods to ensure operational consistency. A contingency fund, also called a rainy-day fund, emergency reserve and budget reserve, is a "tangible hedge of protection," states Mary Hunt in her book "Mary Hunt's Debt-Proof Living." It is an amount of cash set aside in the likelihood of an unforeseeable event.
Requirements
A contingency fund is not the typical savings account. It is an entirely separate pool of money, independent of all other accounts and investments. Mary Hunt states that to be a contingency fund, a pool of money must be safe, available and be allowed to grow. With respect to safety, the fund must be in an amount where it is not at risk. This eliminates an investment in the stock market. The fund must be liquid and accessible within 24 hours. It must be invested to avail the best possible interest rates available.
Amount
Individual households, businesses and governments maintain contingency funds. Financial experts suggest that the average family set aside a minimum of three months of living expenses as a contingency fund. The authors of the book "Ernst & Young's Personal Financial Planning Guide" state that the optimal amount set aside should be between three and six months of expenses. Some organizations use contingency funds to cover essential projects and unforeseen costs. They typically set aside a percentage of the total cost of the project. Governments set aside contingency funds for disaster recovery efforts and allocate it to municipalities when a disaster strikes. For example, as of July 2011, the government of India sets aside 11.3 million U.S. dollars as a contingency fund for disaster relief efforts.
Investing
Contingency funds can be invested as a separate account in a bank or credit union. Alfred V. Scillitani, in his book "Basic Investing Guide for the New Investor," suggests investing in money market accounts, which typically have higher interest rates and allow cash to be quickly withdrawn. Contingency funds can also be kept in high-yielding savings accounts, money market funds, certificates of deposit and interest-bearing checking accounts.
Uses and Importance
A contingency fund is a safety net set aside for emergencies, such as unforeseen cost increases, home repairs, medical bills or funeral costs. It is valuable when the only alternative course of action is credit. Contingency funds come in handy during turbulent financial times to keep individuals and families afloat.
Requirements
A contingency fund is not the typical savings account. It is an entirely separate pool of money, independent of all other accounts and investments. Mary Hunt states that to be a contingency fund, a pool of money must be safe, available and be allowed to grow. With respect to safety, the fund must be in an amount where it is not at risk. This eliminates an investment in the stock market. The fund must be liquid and accessible within 24 hours. It must be invested to avail the best possible interest rates available.
Amount
Individual households, businesses and governments maintain contingency funds. Financial experts suggest that the average family set aside a minimum of three months of living expenses as a contingency fund. The authors of the book "Ernst & Young's Personal Financial Planning Guide" state that the optimal amount set aside should be between three and six months of expenses. Some organizations use contingency funds to cover essential projects and unforeseen costs. They typically set aside a percentage of the total cost of the project. Governments set aside contingency funds for disaster recovery efforts and allocate it to municipalities when a disaster strikes. For example, as of July 2011, the government of India sets aside 11.3 million U.S. dollars as a contingency fund for disaster relief efforts.
Investing
Contingency funds can be invested as a separate account in a bank or credit union. Alfred V. Scillitani, in his book "Basic Investing Guide for the New Investor," suggests investing in money market accounts, which typically have higher interest rates and allow cash to be quickly withdrawn. Contingency funds can also be kept in high-yielding savings accounts, money market funds, certificates of deposit and interest-bearing checking accounts.
Uses and Importance
A contingency fund is a safety net set aside for emergencies, such as unforeseen cost increases, home repairs, medical bills or funeral costs. It is valuable when the only alternative course of action is credit. Contingency funds come in handy during turbulent financial times to keep individuals and families afloat.
Posted in: Business Plans
