A contingency fund refers to money that is set aside to cover unexpected costs that may arise due to certain events or circumstances not taken into consideration when creating a budget. The term is usually employed in business, although it can be applied to practically any financial situation. Having a contingency fund is a way of ensuring that there will be funds to access in case of an emergency.
One example of the use of contingency funds are at the highest level - the government. Various departments and bureaus of governments have contingency funds that are set aside at the beginning of the fiscal period. These funds are usually meant to be used in case of a disaster. As such, in this context, it is not uncommon for terms such as disaster recovery fund and disaster assistance fund to be used in lieu of contingency fund. Government contingency funds are not solely used for disasters, though. There may be contingency funds set up for other purposes, such as temporary deficits in the operating budget.
In business, contingency funds play the same role - to cover unexpected expenses for whatever reason. For example, if a key piece of equipment unexpectedly malfunctions and the cost is not included in the budget for that period, the business can draw upon the contingency fund for repairs. The same principle applies if the profits take a beating or the company suffers from a loss due to unforeseen events.
On a personal level, your rainy day money can be considered your contingency fund. Personal finance experts even suggest having at least six months’ worth of money set aside to take care of things in case something happens - that is your contingency fund.