No matter what you earn or how you spend your days, having a cozy cash cushion behind you is a must. Not only will this protect you in emergencies, it’ll give you peace of mind.
You Never Know What The Future Holds
The truth is, you never know what the future holds. Maybe an expensive home appliance will break beyond repair, or maybe you’ll be forced to take a pay cut at work. The future is uncertain, and while this can be scary, having a cash cushion behind you can help to give you more security.
Having a cash cushion is also crucial if you have a business. After all, you don’t know for certain what will change, and what things will be like month to month. A cash cushion will ensure you can still pay your staff and do what you need to do to go on for the foreseeable future.
A cash cushion is important if you want to buy a house. It isn’t enough to simply have the deposit. By having a cash cushion, you show you are responsible with your finances and able to pay off what you need to pay whatever happens. A cash cushion can also protect you from smaller issues, such as accidentally going overdrawn by a small amount. The bank charges can be hefty!
It’s up to you if you want to have two different funds. For example, a larger emergency fund for things like job loss, vet bills, and the need to pay personal injury law firms after an unexpected accident. You could then have a smaller cash cushion in your checking account, anywhere from $100-$500 to protect you from overdraft fees and other things that might crop up. Although you won’t be overdrawn in the eyes of the bank, you should keep a mental note of where you’re at and consider yourself overdrawn, replenishing your cash cushion as soon as you can.
So, how can you go about creating the right cash cushion for you?
Risks and Responsibility – your risks and responsibilities can have many factors. Do you have children who depend on you? Is your job stable, or is there a chance you may lose it/get a pay cut at some point? Be realistic.
Essential Expenses – figure out your essential expenses, for example, food, heating and other bills, phone bill, etc. Then, consider how many months you’d like to have backing you up. Some say 6 months, but you might want more or less than this depending on what you feel comfortable with.
Any Other Needs – you might also want to put some money aside for things like unexpected vet and medical bills. You hopefully won’t need to use them, but at least you know they are there if you ever do.
Hopefully, you’ll start putting money into your cash cushion/emergency fund as soon as possible. You might panic and think you need to build it up right away, but you shouldn’t struggle. Do some calculations and contribute realistically each week/month.