In continuation to the Financial Planning - Part I , here Iam covering the first aspect of the financial planning.
1) Contingency Fund ( The First and Foremost Important)
Once an individual starts earning , He/She starts experiencing a certain lifestyle and this lifestyle keeps changing in accordance with the changes in their income .
In addition,earning individuals get into commitments like home loan,car loan , personal loan etc .
Adding to this, any family responsibilities like child education , Elderly parents' care and social expectations adds to regular cash outflow.
This leads to a situation - where he may get a lot of income but majority of it is a must for his status-quo.
Given this scenario, what happens if an individual's regular income is stopped for a short/long period for many possible reasons like - Loss of job/Business , long term health problems , taking break etc..
none of these reasons can be ruled out and majority of the people in working/earning age experience one or more of these at some point of time .
Any of these situations, put a lot of pressure on the individual and if there is a financial problem associated to this, it will be a very tough situation to come out . The individual can not focus on getting back to earning as he will be pulled into the financial problems. Also, this may force to draw from long term plans affecting one's retirement plan etc.
What can be done to tide over these situations ?
As per the experts of Financial Planning, it is always suggested to keep track of monthly outflow of cash for 'all must to have ' things. lets say this amount is 'MMC' -' Monthly Must To Have Cash' ( this is my own word :) )
Once this amount is known - multiply it with 4 ( 4 X 'MMC') and then add a buffer of 20% (.8MMC) to it. So the total is - 4.8 X 'MMC'.
The action item is to build a contingency fund of 4.8 MMC from the income .
Questions arise - should I keep this money idle? Am i not losing the income this money may generate if I invest in so and so ?
while these may sound relevant questions, by spending some amount of time one can find investment avenues , where they an park this contingency fund for good returns.
options like Liquid Mutual funds can be explored- Better than Bank interest ( Depends on mkt, though) any time access to the fund , can be with drawn in 2 days.
1) Contingency Fund ( The First and Foremost Important)
Once an individual starts earning , He/She starts experiencing a certain lifestyle and this lifestyle keeps changing in accordance with the changes in their income .
In addition,earning individuals get into commitments like home loan,car loan , personal loan etc .
Adding to this, any family responsibilities like child education , Elderly parents' care and social expectations adds to regular cash outflow.
This leads to a situation - where he may get a lot of income but majority of it is a must for his status-quo.
Given this scenario, what happens if an individual's regular income is stopped for a short/long period for many possible reasons like - Loss of job/Business , long term health problems , taking break etc..
none of these reasons can be ruled out and majority of the people in working/earning age experience one or more of these at some point of time .
Any of these situations, put a lot of pressure on the individual and if there is a financial problem associated to this, it will be a very tough situation to come out . The individual can not focus on getting back to earning as he will be pulled into the financial problems. Also, this may force to draw from long term plans affecting one's retirement plan etc.
What can be done to tide over these situations ?
As per the experts of Financial Planning, it is always suggested to keep track of monthly outflow of cash for 'all must to have ' things. lets say this amount is 'MMC' -' Monthly Must To Have Cash' ( this is my own word :) )
Once this amount is known - multiply it with 4 ( 4 X 'MMC') and then add a buffer of 20% (.8MMC) to it. So the total is - 4.8 X 'MMC'.
The action item is to build a contingency fund of 4.8 MMC from the income .
Questions arise - should I keep this money idle? Am i not losing the income this money may generate if I invest in so and so ?
while these may sound relevant questions, by spending some amount of time one can find investment avenues , where they an park this contingency fund for good returns.
options like Liquid Mutual funds can be explored- Better than Bank interest ( Depends on mkt, though) any time access to the fund , can be with drawn in 2 days.
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