We recently encountered the case of an individual who wanted to create a financial plan for a very specific reason.
This individual, lets call him Mr. X, was uncertain about his future financial situation.
He is working with IT firms as a Consultant, and recently had been informed that new projects were going to be fewer than before. This put his cash inflows in a slightly precarious position and he wanted to ensure that his life goals such as retirement, his house purchase for which he already had a home loan running, and his child's educations were secure.

When in such a situation, the first and most important step is to build up an adequate contingency fund. Typically a contingency fund consists enough cash to take care of 6 to 24 months of expenses. This includes all necessary expenses, but can exclude luxuries.

Consider the case of this individual Mr. X.
He earns Rs. 90,000 per month on average from the projects he works on.
His monthly expenses that are absolute necessities are:
-Home Loan: Rs. 30,000
-Household: Rs. 15,000
-Transport: Rs. 5,000
-Child's school fees: Rs. 3,000
Total necessities expenses are: Rs. 53,000

In this case, 6 months of expenses would be Rs. 3,18,000, and 24 months of expenses if Mr. X chooses to be conservative in his outlook, would be Rs. 12,72,000.
When people first hear that it is important to keep at least 6 months up to 24 months of expenses aside, they tend to think of it as a large sum. Often the reasoning is, this money is just lying idle, and that means it is losing out on what it could be earning if it was deployed into an aggressive asset class such as equity or property.

But that's not what a contingency fund is for.

The purpose of having a contingency fund is to take care of your family's and your expenses in an emergency situation, such as losing your job, markets crashing, or an unseen emergency that causes you to not be able to work for some time.

Often there are financial obligations that absolutely must be met no matter what your professional or personal situation is. Loan EMIs are a prime example. This is why you must have a contingency fund. So that if for some reason, your cash inflows reduce or halt, or your expenses suddenly shoot up more than your income, you don't have to worry because you have anticipated this and have set the funds aside. In this situation for Mr. X, he chose to build a 1 year contingency fund because his cash flow uncertainty was higher, being a consultant.

So what do you do if you don't have a contingency fund, lose your job, and have a loan to service? How do you manage your debt?
 

• Step 1 would be to immediately let your bank or lender know about your future cash flow situation. Ask them how you can work together to ensure you are a safe borrower and pay your EMIs on time. They will likely restructure your loan to a lower EMI and a longer tenure.
   
• If you need to, speak to a credit counsellor, there are plenty of credit counselling agencies that offer help for free.
   
• Cut out all un-necessary expenditures and focus on meeting only the necessities.
   
• Avoid taking a personal loan as long as possible, as the interest rate on personal loans is exorbitantly high and can have a crippling effect on your efforts to get back on your feet.
   

As soon as you have a new job and some certainty on your cash flows, start building up a contingency fund before you approach your bank to take your loan structure back to its earlier form. If you have any EMIs you must remember to include them in your necessity expenses when building up your contingency fund.
Remember, there are events such as job loss or illness that can get in the way of your regular cash flows, but this should not get in the way of letting you achieve your life goals with consistent investments into the right schemes.

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