What is a Contingency Fund?

A contingency fund is also called as your emergency fund or “safe and sound” money.

By definition, according to most financial planners in the US, the emergency fund should be equivalent to 3 months worth of your living expenses if you’re an employee. This amount will be higher if you’re self-employed, around 6 months worth.

Why 3 months? This time-frame is based on the average time a US employee would find employment in case he/she loses her present job, thus the name “emergency” fund. In the Philippines, we don’t know the average time a Filipino employee would take to replace a lost job but with our current unemployment rate, I assume it would be safe to save up more than 3 months worth. Maybe 6 months will be enough or higher if you want.

Next to debt payments (if you have any but better if you don’t ), building the contingency fund is the next step to financial freedom. This money should be kept in instruments where it is accessible but also pays a decent interest. Now, bear in mind that you want capital preservation for this fund so I would not recommend putting this into stocks or any high risk investment instruments. You can opt for a savings account if you want to be very liquid, but then again you can look into time deposits, T-bills, or a well-managed low risk mutual fund for example.

It is always safe to save for the rainy days, they say. Build your contingency fund so that if you fall hard, you will have a cushion to fall into.
Good luck to us!