What is a financial cushion and what does it give us? This is the most important parameter of ensuring personal finances, and it can come in handy when you least expect it. We explain how to make a financial cushion and what it should be so that you feel safe.
Financial cushion – definition
What is a financial cushion ? These are nothing but funds set aside for a “rainy day” that will support the household budget in emergency situations. The role of the pillow is to protect us both financially and morally. Knowing that we still have money, we approach any sudden problems from a distance and feel safe.
What kind of financial cushion should give us this sense of peace?
How much it should be depends, in particular, on our income, the number of dependents.
The size depends on our needs and income. However, three pillow options are usually used, each of which gives us some comfort:
- The value of a 3-month salary is the minimum option
- Salary for 6 months is the best option
- the size of a 12-month salary is an ideal option
What does a financial cushion give?
The amount deposited in the account that can be taken at any time can be useful to us at the most unexpected moment, for example, in case of illness, loss of work or breakdown of household appliances. The higher the cost of a financial cushion, the more comfortable you are!
Another important advantage of having an airbag is the psychological comfort it provides. When, for example, we have to leave our current place of work, the time that we have to devote to finding another job can be long. Meanwhile, the realization that we have the capital to do this, because we have taken care of providing for our basic needs, can significantly reduce our fears!
How to create a financial cushion? Step-by-step guide
How to create a financial cushion and not worry about the future? The most common argument that we use to defend the fact of not putting money “for a rainy day” is too low monthly income. It’s time to put an end to this!
To create a reliable financial cushion, you don’t have to be one of the richest! It is enough for us to change our habits to learn how to save. Even small amounts to start with! A small guide on how to save on a financial cushion has been prepared especially for you.
Determine the target value of your financial cushion
The first step will be to choose a pillow option that we can assemble. To do this, it is also worth keeping records with all expenses for at least a month. This will help determine how much money we should set aside, as well as how long the chosen pillow will last us.
Determine when you want to save the amount for the selected airbag.
Once you have decided on the size of the pillow you want to save, it’s time to allocate a certain amount of time. The easiest way to do this is to divide the cost of the pillow by the number of months, which will show you how much money you should spend on it per month.
Have you done it and are you afraid that you won’t be able to do it? Calm down – despite the appearance, there is always room for savings! Choosing cheaper products, using promotions or saving water and electricity can significantly help you in this. Attention! Also, start eliminating unnecessary expenses for the time of “belt tightening”. It is better to postpone extravagant shopping.
Plan regular transfers of savings to a separate account.
How to create a financial cushion quickly and efficiently ? Create a separate savings account. Transfer the pre-set monthly cost to the account immediately after receiving the payment. This way they won’t “run away” from your main account to your daily expenses. Moreover, in case of an emergency, you have access to your money “on the spot”.
The role of a financial cushion is not to receive interest! Therefore, in this case, savings accounts or deposits may not work.
Put aside the extra savings.
The airbag grows while you do it. However, the pace of savings can be significantly accelerated by allocating any surplus funds for these purposes. We know you had different plans for this… But after a certain time you will be grateful!
Financial cushion: where to store the saved money?
If you are already using one of the options for a financial security cushion, it’s time to decide where you will store the saved money.
As we have already mentioned, creating a separate account for this purpose is one of the best ideas. We have not only immediate access to savings in case of an emergency, but also the ability to pre-evaluate their value at any time.
An alternative for fans of traditional solutions may be to store cash in a safe place, for example, in a home safe or envelope. The disadvantage of this form of financial cushion storage is the ease with which we can get it. That’s why it’s worth showing a little discipline!
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