Have YOU ever faced a financial emergency?

Meet Paresh Mantri, 36, who lost his job during the dotcom bubble burst of 2000. The blow was so sudden that it took him some time to realise he was jobless. He had a family to support and with little savings he was in a real state of panic.

What made him more panicky was the fact that his wife three months pregnant and his 5 year old son was about to enter Class I. Unfortunately Paresh believed in living only for the day and had no savings to fall back on during such a crisis.

Thankfully he was supported by his financially sound father-in-law till he got another job in about six months' time.

I am sure many of you would to like to get into Paresh's shoes. But have you ever thought what will you do if you were to ever face such a situation (God forbid) or face sudden illness or demise of an earning member of your family?

Always save for a rainy day!

Emergencies -- howsoever unwelcome they are -- never knock before visiting on your door. We cannot predict them or even prevent them. But one thing you can do is try to buffer yourself and your dependants so that if your life suddenly turns upside down due to any such event then you have a life line to hang on to.

As the saying goes, always save for a rainy day. How many of you actually do it is a moot question though. Many want to do it but would not know as to what the right amount is or how to go about it.

Predicting the right amount is as difficult as predicting unfortunate situations. But what you can do is plan for such emergencies so you do not have to panic at that very moment when the most important thing would be to remain as stable and balanced as possible. Thus, planning for such emergencies is known as 'contingency planning'.

For any strong financial base contingency planning is very important. You need to first plan for such eventualities and then take the next step up the financial planning ladder.

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Here is a small guide that will help you to arrive at the figure which you need to keep aside as contingency fund.

How to calculate

Every house must have some kind of a budget for monthly expenditure. From this monthly budget deduct avoidable expenses like hiring a DVD or eating out. What you arrive at are expenses which even in a worst scenario have to be met.

Prepare a cash flow statement of your mandatory expenses. These can be divided in to fixed mandatory outflows and variable mandatory outflows. A list of such mandatory expenses is listed below.

The above table can be only indicative though not exhaustive. The amount that every individual/family spends in a month may change from one person to another depending on various factors like monthly income etc. There can be more fields in the above category depending upon an individual's needs and responsibilities.

As seen in the above table the yearly expenditure comes to Rs 3,25,500. This translates into monthly expenditure of Rs 27,125. On a prudent basis let us round it off to Rs 27,500 per month.

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As planners and financial experts around the world suggest, including me, emergency or contingency funds should be able to provide for at least three months of expenditure. Hence your contingency fund should comprise of minimum of Rs 27,500 * 3 months = Rs 82,500.

Why three months? In most scenarios three months are enough to overcome an adverse situation and get your life back to normal.

The amount might seem big. To keep aside this amount at one go might seem difficult. So in order to lighten the burden you can start keeping aside a small percentage of every month's budget towards emergency fund. Although this might seem difficult in the beginning it will discipline you in your savings habits. Also, with this contingency amount in your kitty you will have not much to worry about in case of financial emergencies.  

Safe keeping

It is always better to keep your contingency fund in a safe as well as easily accessible place. The suggestions below might help but every individual can have her/his own method of safe keeping so that money is available even at a short notice.

~ Cash: In the above example say Rs 30,000 should be kept as cash in hand at home. In case of any emergency a certain amount of cash is very necessary.

~ Savings account: The balance amount of Rs 52,500 can either be parked in savings account which can be linked to a fixed deposit or just plain savings account. Make sure that the bank selected has an ATM facility. This allows quick access to your emergency funds which is very vital.

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~ Liquid fund: Or if you are opting to save every month an amount meant for emergency fund say in the above example it is Rs 6,875 per month (Rs 82,500 divided by 12) then you opt to keep aside Rs 2,500 as cash in a piggy bank (which should be opened only in emergencies) and rest can be invested in a mutual fund which you can easily sell and convert units into cash.

The purpose of this fund is to improve your financial security by creating a safety net that can be used in case of emergencies. Thus start saving for your contingency fund today and be prepared for any financial adversities.

Have you ever faced a financial emergency? How did you cope with it? Are you in the habit of keeping aside a small amount every month for a financial emergency? How do you manage to do it? Do you have a plan to help young people build such a fund?

Share your views/plans with us. Write to us at getahead@rediff.co.in -- be sure to include your name, photograph, age and family and contact details. Inspiring responses will be published right here on rediff.com.

The author is a financial consultant and can be reached at dhanplanner@rediffmail.com.