Definition
Contingency Planning
Contingency planning is preparing financially for unexpected shocks — job loss, medical emergencies, disability or death — so they do not derail your long-term goals.
The cornerstones are an emergency fund of several months' expenses in liquid form, adequate health insurance (to avoid liquidating investments for a hospital bill), and sufficient term life insurance if others depend on your income. Disability or critical-illness cover and a clear nominee/will round out the plan.
In India, a single uninsured hospitalisation or a few months without income can wipe out years of savings, so contingency planning protects the rest of your financial structure. The aim is that a shock becomes an inconvenience, not a catastrophe that forces you to sell long-term assets at the worst time.
Related terms
- Emergency FundAn emergency fund is a readily accessible reserve of cash set aside to cover several months of essential expenses, protecting against income loss or unexpected costs.
- Sequence-of-Returns RiskSequence-of-returns risk is the danger that poor investment returns early in retirement — when you are withdrawing money — can permanently damage your portfolio, even if average returns are fine.
- Term InsuranceTerm insurance is pure life cover that pays your family a large sum if you die during the policy term, in exchange for a low premium.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.