CONTINGENCY PLANNING




Emergency! Emergency!

Image via Wikipedia

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.


What is contingency planning? How to go about it?


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.

Begin by preparing a cash flow statement. List all the  mandatory expenses. Break down mandatory expenses further into fixed mandatory expenses like loan EMIs, insurance premium, rent, etc and variable mandatory expenses like grocery expenses, transportation expenses, electricity bills, phone bills, etc. These are expenses which vary from month to month.
From the exemplary table, the yearly expenditure comes to Rs 3,53,072. Hence, the monthly expenditure equals Rs 29,423. The contingency or emergency fund should consist of amount equal to three months of a person’s mandatory expenses. Hence the amount a person needs to keep aside is Rs 88,269 (Rs 29,423*3).


Why consider three months?


Research has shown that generally three months are enough for an individual to come out of any catastrophe. If a person is retired then he needs to keep aside at least six months of mandatory expenses. So the above figure will come to Rs 1,76,538 (Rs 29,423*6). This amount definitely seems difficult to keep as contingency. This fund can be raised slowly. The fund should be bifurcated in the following manner: Cash In Hand: The amount to be set aside in cash is called as cash in hand. From the above example, the person should keep aside Rs 15,000 as cash in hand. Savings Account: A part of the fund should be kept in a savings account and should be easily accessible through an ATM. From the above example, Rs 20,000 should be
available in a person’s savings account at all time. Liquid Fund/ Bank Fixed Deposit: The balance amount in this case which is Rs 53,269 can either be invested in liquid funds or in a bank fixed deposit. Since a person can also earn returns, it will be safe and easily redeemable. If saving this amount seems difficult, begin by keeping aside small amounts every month. The above amount is for an emergency and not for daily needs. As and when one withdraws the amount from this fund, he must remember to replenish the fund.

INSURANCE PLANNING
Once the first step of contingency planning is covered, move on to the second step - insurance planning. It is the second step of a sound financial plan and risk management. Insurance is planning for any untoward incidents in an individual’s life. Remember to have a life insurance cover for the earning member of the family and a health insurance cover for every member of the family. Once the above two are in place, the risk is covered. A person cannot predict when a crisis might strike but he can at least prepare himself for such unforeseen events.

Thanks to Nirmal Bang Beyond the Market

Reblog this post [with Zemanta]

0 comments:

Post a Comment

All comments are moderated. Please post no spam

Disclaimer & Privacy Policies

(c) Mrs. Ruby Christy. This site and contents are owned by Mrs. Ruby Christy;
Use of this website and/or services offered by us indicates your acceptance of our Disclaimer& Privacy Policies.

Information and opinions provided on this website (www.investchips.com) has been independently obtained from sources believed to be reliable. However, such information may include inaccuracies, errors or omissions. Investchips.com and its affiliates, information providers or content providers and R.John Christy and his Family shall have no liability to you or third parties for the accuracy, completeness, timeliness or correct sequencing of information available on this website or feeds, or for any decision made or action taken by you in reliance upon such information, or for the delay or interruption of such information. Investchips.com,its affiliates, information providers ,content providers and R. John Christy and his Family shall have no liability for investment decisions or other actions taken or made by you based on the information provided on this website. Any action you choose to take in the markets is totally your own responsibility. Investchips.com and R. John Christy and his Family will not be liable for any, direct or indirect, consequential or incidental damages or loss arising out of the use of this information. This information is neither an offer to sell nor solicitation to buy any of the securities mentioned herein. Opinions expressed by R. John Christy are his own and not of his past, present and future employers.
The DoubleClick DART cookie is used by Google in the ads served on this websites displaying AdSense for content ads. When users visit this website and either view or click on an ad, a cookie may be dropped on that end user's browser.
  • Google, as a third party vendor, uses cookies to serve ads on this site.
  • Google's use of the DART cookie enables it to serve ads to your users based on their visit to this site and other sites on the Internet.
  • Users may opt out of the use of the DART cookie by visiting the Google ad and content network privacy policy.
  • www.investchips.com never collects any personal information of visitors.