As is the economic situation of many, it is usual to think more of a "cushion", that is, of saving a part as an emergency fund or contingency fund. But do you know that both are not the same? What do we mean by the second then?
If you live by day with what you earn, or stretch what you have as much as possible, sometimes taking something out to have some savings for unforeseen events can make you fall asleep much better. But, What would a contingency fund be? And why is it not the same as the emergency one?
What is a contingency fund
Let's start by knowing what a contingency fund is. You should know that this refers to having a a certain amount of money that should not be touched unless it is to solve unforeseeable problems that have come into your life. For example, it could be due to a car accident, where you must use those savings to fix the vehicle and get it working again; or that a traffic fine has come to you and you need to pay it on the date it comes out in the middle.
Now, what we say to you may well be calling it in your home (or company) an "emergency fund" but, is it really the same? From now on we tell you no, and then we will explain why.
Differences between contingency fund and emergency fund
Un emergency fund is a lifesaver for your day to day. It consists of having a certain amount of money saved in case there is something unforeseen in your home or business, so that you do not have to depend on a bank, borrow money or do something else to solve that problem.
You might be thinking that it is the same as the contingency fund, but there is a big difference with it. And is that the contingency fund requires a larger amount, since it is what would be used to «respond» to rather «large» contingencies, in that they are expensive. However, in the case of the «emergency», there would be those unforeseen situations that do not suppose a large number, which are more «daily» expenses before others.
Thus, both are the same, but at the same time the objective they have is not. While one is for necessary expenses that are not too expensive, in the case of the contingency fund it would take care of the larger ones (which is why the saved figure must be much higher).
Advantages of having a fund
We know. It can be difficult to create a contingency fund (even more so if we tell you that you also create an emergency fund). And yet there are many advantages that can make you decide to control expenses and save. Because, among the advantages that you are going to find, are the following:
- Greater peace of mind. Knowing that you have money saved, even if you do not use it, helps you, and a lot, to keep stress at bay. You know that if something happens, you are going to be able to cope, either totally or partially.
- You will save more. By feeling calm, with an economic network that supports you if something happens to you, you will want it to be even greater. In other words, you are going to promote saving because your mentality will no longer be that of "living day by day", but rather that of "living and saving a little", especially since we never know what the future will bring.
- You can indulge yourself. Be careful, over time. Because as you save, if there is no unforeseen event, that figure rises and it may come a little when the contingency fund can be divided into different funds, or even use some for "whims", in such a way that when a limit is reached you can use it. Keep in mind that you should not always be saving without enjoying from time to time.
How the contingency fund is endowed
There is no doubt that a Contingency fund can only be created with the income you have. If you have a job, with what you earn at the end of the month with it; if you have a pension, it helps… the same. But, how much percent should I leave to endow the fund?
In this case, the amount will depend on your lifestyle. A person who lives alone and has a non-contributory pension is not the same as one with a large family where only one works. But no matter how little you can save, it is important to do so.
Thus, you can get some amount of salary, aid or pensions, unforeseen gains (lottery, inheritances, donations, etc.) In other words, from any income that may come to you.
How to create a contingency fund
Focusing now on the practical, we are going to talk about how to create a contingency fund. This will largely depend on the above, that is, on how you are going to endow it (where are you going to get the money for that fund), so it can grow more or less depending on what you save.
But, to do this, keep the following in mind:
Set a budget
It is important that know what expenses and income you have per month. Write them all down.
Now, separate expenses that are fixed from those that are variable (shopping, going to the gym, going out with friends ...).
Consider those expenses, are they all important or is there one that you could do without? If so, you are already taking a long time to get rid of it.
Find the difference between income and expenses. For the month to go well, you need at least everything to be at 0, that is, that the income - expenses is equal to zero, although the ideal is that you should have a positive figure.
Decide how much you want to save
From that positive number, you need establish a percentage of savings. For example, imagine that from the income, once you have paid all the expenses, you have 100 euros left. You can choose to save 25 euros in the contingency fund and the rest in the emergency fund (to buy clothes, if there is an unforeseen expense in the purchase, etc.) and, if you do not use it, you could include it in the contingency fund.
That money that is kept in the contingency fund should not be touched under any circumstances. Only in case of a situation that requires using it as a serious unforeseen event. As little as you see that you can save, in the long run you will have more and more money, and that could mean the difference between being overwhelmed and being more relaxed.
Do the same every month
No, it is not silly. If you do this every month, do you know everything you can have saved? Continuing with the previous example, of 25 euros per month, if we multiply it by 12 months (not counting extra payments), we are talking about 300 euros. Yes, it seems little. But now multiply that number by 10 years. You would have 3000 euros for any unforeseen event. If you can also allocate something more to that fund, it will help you feel much better.