A contingency fund is simply a reserve fund set aside to handle unexpected debts that are outside the range of the usual operating budget. This model of maintaining reserve money as protection against possible loss in the event of an emergency situation can be utilized in a number of situations. Governments, private businesses, and even individual households can establish and maintain a contingency fund as part of the overall financial plan of operation.
In a government setting, the contingency fund is often identified as a disaster recovery fund or disaster assistance fund. Generally, the terms of use for the reserve money placed into the fund will be clearly defined. This action makes it possible for local and national governments to provide assistance to citizens and municipalities when some type of natural or economic disaster takes place, provided the event meets the qualifications set in place for the fund. At other times, a government may establish a contingency fund as a backup against possible losses in income from taxes and other revenue sources. When this is the case, the government can draw upon the fund to cover shortfalls in operational costs, keeping key public services such as law enforcement and city services functioning.
Businesses also make use of the contingency fund model. As with governments, many businesses choose to create a fund that can be called upon in the event that income does not meet general business expenses. For example, the fund may be used when unanticipated repairs or replacement of key manufacturing equipment take place. At the same time, it may be used to cover general operational expenses in the event that the sales of the company take an unexpected dip due to natural disasters or political upheavals.
For the home, financial counselors often encourage the establishment of a contingency fund. Many experts will urge households to create and maintain such a fund that contains enough resources to cover the usual expenses associated with the home budget for a period of six months. This level of protection helps to safeguard individuals and families from such unanticipated events as a serious and prolonged illness, loss of a job, or the destruction of the home during a natural disaster.