Contingency Fund Example

contingency fund example - change in a jarA contingency fund is cash set aside by a company or an individual to be used in the event of unforeseen need.  Unfortunately, unforeseen needs happen all the time, from the bill that was not expected to the loss of a major client.  A contingency fund example is a savings account with up to six months worth of revenue.

Liquid Money

Set up your contingency fund with liquid, spendable, money.  Cash under a mattress would be a good contingency fund example where the cash is easily spendable.  However, cash under a mattress would be susceptible to theft, fire, or flood; or some other sort of loss.  Cash in an FDIC insured account would be a better idea, as long as the amount of money is below the maximum insurable FDIC amount.

Gold, stocks, bonds, or other investment vehicle would not be liquid money as they must be converted to cash in order to be spendable.  The time involved for conversion may be a factor as the emergency event may be time critical.

Access to the Contingency Fund

If you have good self control, access to the contingency fund should not be an issue.  Some people may be more inclined to use contingency money for lesser issues.  Consider for yourself if you need to make access to your contingency account more formal.  For instance, you could require multiple signers on the account so that an associate can second guess the need to use the money.

Alternative Contingency Fund Example

Potentially credit can be used as a contingency fund.  Something such as a line of credit with the bank, invoice factoring, or even credit cards.  In any case, repaying used credit should be a priority as leverage creates business risk.

For instance, if you use credit to get beyond an emergency, another emergency can make it difficult to repay or even make payments.  Banks or other creditors can get bent out of shape and make it very difficult to remain in business.  Use caution.

Further reading:

Leave a Reply