How much cash cushion do you need?
How much cash cushion do you need?
In light of the recent current pandemic that’s creating an economic uncertainty, a cash cushion is crucial to your financial health.
First, let’s discuss the difference between a cash cushion versus an emergency fund.
According to the balance:
In general, a cushion is a small balance (less than $1,000) that you maintain in your checking account for the sake of avoiding overdrafts. An emergency fund, on the other hand, is a large balance that’s meant to sustain your living expenses for months after a major event like job loss or a medical emergency.The Balance
Financial advisors recommend having at least 3 to 6 months of fixed expenses put aside for the emergency fund. On the other hand, a cash cushion amount varies.
It’s best to tailor an emergency fund to your own situation. But if you don’t want to, most financial experts recommend a fixed amount of around $10,000.
If a fixed amount doesn’t work for you then an annual savings percentage from your income may do the trick. Start slow and aim toward at least 10% of your annual income and go up from there. You can stop when you exceeded your pain threshold (financially speaking).
Of note is that when you have reached your emergency fund goal then the extra money will go toward your retirement investments such as a Roth IRA.
Emergency Fund Tool
And finally, if you like to use tools there’s an Emergency Fund Calculator created by Money Under 30 that will help you do just that.
For example, using the tool, I inputted that my average monthly expenses are $2,000 and I have zero existing liquid savings (excluding retirement).
I guess if it’s round even numbers like this example then you really don’t need a tool.
The tool recommended me to save up to $6,000 to cover 3 months of expenses, it’s a very straight forward tool and I recommend you to try it out. It’s also taking into account how difficult it is for you to find a replacement job, You may have to increase your emergency fund if your job is difficult or very difficult to replace.
Cash Cushion Tool
According to CNBC‘s personal finance blog, a new tool from JPMorgan Chase is really helpful in determining the amount of cash cushion you need based on your take-home income and age range. Disclaimer: I tried to use this tool but it’s not working right now, I was excited to use the tool to find out how much cash cushion I needed.
CNBC reported that according to various surveys, only 49% of U.S. adults expect to be living paycheck to paycheck this year.
Another 53% do not have an emergency fund that covers at least three months of expenses.
Only 40% are able to cover cover an unexpected $1,000 expenses with their savings.
On average, families need six weeks’ worth of pay set aside for a money cushion fund. And according to Chase, two-thirds of U.S. households don’t have a sufficient money cushion to weather the storm.
All the statistics is very concerning and is the more reason to get your financial house in order.
How to Create a Cash Cushion
It’s important to have both an emergency fund and a cash cushion in preparation for a time of uncertainty. In times of unexpected expenses but not yet an emergency, you’ll probably reach out to your credit card to cover those expenses.
I.E. your pet broke his leg and needed surgery that cost $2,000!
Created cards are great for many reasons but high interest rates is not among the reason. If you’re able to pay in full the balance every month then more power to you.
A cash cushion can you give the peace of mind that comes with knowing that you have cash to fall back on unexpectedly.
The key to funding both your emergency fund and cash cushion to control your spending. If reducing expenses is not your cup of tea then it’s time to look for ways to increase your income through side hustles.
Maybe you’re a superstar and you can do both, by increasing earning through a side hustle and slashing your spending like a ninja!
Once you have your cash cushion, it’s advisable that you don’t keep the money in the same checking account that you use on a daily basis. Why? Well, you may be tempted to spend it all that’s why!
It’s best to open a separate savings account elsewhere and forget about it. I would personally recommend a high savings account such as Betterment Cash Reserve or Sofi Money.
It’s important to have both an emergency fund and a cash cushion. One for short term expenses and the other for longer term expenses.
It’s important to stay disciplined and commit to doing it. Once you put your mind to it, I believe that you’ll able to set aside six weeks of pay and 3 to 6 months of living expenses.
Make sure to keep both your cash cushion and emergency fund in two separate accounts to protect it against yourself!
What are we waiting for? Let’s get started to build and secure your funds to have a peace of mind. Good luck my friends.