How To Establish And Build A Contingency Fund

A contingency fund is an easily accessible cache of savings that you can dip into if an emergency arises

. Most financial experts recommend that you have at least three months worth of income set aside to tide you over in case of illness, unemployment, changes in income and major family events.

However, the recent economic downturn has proven all too well that a savings account equivalent to three months worth of income is only a drop in the bucket of what is needed in truly dire times. For the purpose of this article, we are going to use six months worth of income as a good starting point.

Before you can set up a fund, you need to assess your needs. Six months worth of income is a good average, but some families may need more. If your job or career field is especially unstable, you might want to think about adding a little more cushion. The following are some other reasons that may affect the amount of money that you need to put away into your contingency fund:

* Long-term family medical expenses resulting from major illness of disability of family member.

* Debt obligations that are on a deferred payment option currently, but will become due in the future. This includes all "Don't pay now" offers, student loans, etc.

* ARM or balloon mortgage.

* Self employment.

* Fluctuating business and/or employment expenses.

* A house in need of major repairs or an auto that has seen better days.

* Benefits that will cease if employment is disrupted such as health insurance, vacation pay, bonuses, etc.

Now that you know how much money you need, it's time to get to work establishing a fund and building it. Remember; all of the money in a contingency fund needs to be easily accessible. Retirement and insurance cash outs can take weeks or months to access, making them a last resort. Instead, focus on cash savings and easily accessible lines of credit.

Your number one priority when establishing a contingency fund is to establish and build up a cash savings account. Every dime you save should go toward this fund until it is of a sufficient amount. Stop investing in your retirement plan and funnel the money into your savings account. Once you have reached your goal, you can start contributing to your retirement fund and other investment portfolios again.

You can also use lines of credit to pad your contingency fund. However, lines of credit must be established before problems occur. Apply for low-interest credit cards, and store them away. Do not ever use them unless it is absolutely necessary. You should never use emergency lines of credit unless it is a matter of home, health or hunger.

A substantial contingency fund will help you sail through the hard times and negate the need for hasty measures that could affect your financial independence. Think of it as building a solid foundation for your future. If the foundation is soft, everything that you build could come crumbling down in an instant.

by: Dan Cavalli

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