Why you should have a “Cash Cushion”... AND an Emergency Fund
What is a Cash Cushion?
A cash cushion is a balance kept in your bank account to eliminate your account going into overdraft or receiving dishonour fees because of insufficient funds. The cash cushion amount is your safety net amount and discipline is required to ensure you retain that balance in your account, rather than dip into it on a regular basis.
How Much Do I Need?
Each person operates their bank accounts and pay their bills differently. With a substantial cash cushion you would be able to pay bills regularly, have sufficient funds should you need to pay for car repairs, have to pay an insurance excess, purchase a new hot water system or other similar out of pocket major expense.
Creating a substantial cash cushion will eliminate the need to incur debt by using credit cards or securing personal loans as your short term emergency cash options.
The exact value of your cash cushion safety net depends entirely on your personal circumstances, your day to day living expenses and what likely events may occur. A single person living at home with their parents will obviously not require as high a cash cushion as a family with three children, a mortgage, two cars and pets. It is not a great move having too much cash tied up getting next to no return, but a good rule of thumb is to aim for about a month’s living expenses as a cash cushion.
What is an Emergency Fund ?
An emergency fund is exactly what it sounds like, access to funds in an emergency. The standard rule of thumb is to set aside an amount that would cover 3-6 months of living expenses, as that would see you through a short term loss of income, sudden health related expenses, an emergency overseas airfare or other unexpected major financial situations.
How Much Do I Need?
As always, the amount you need will depend upon your family situation, your lifestyle, the economic climate you exist in and your current level of debt.
What financial impact would a loss of income have on you or your family? How would you secure cash to pay funeral costs of someone close to you? Would it be probable that you would need to go overseas in a hurry? Where would you live if your house was damaged in a natural disaster? How would you pay for emergency medical expenses?
Some people take comfort in having large leave accruals or contractual termination payments that would be paid out if they lost their job, but in today’s economy there is no guarantee that if your company went into receivership, you would ever see your payments.
By starting work today on calculating how much you would need for your cash cushion and your emergency fund and revisiting your budget to establish how you can cut expenses and save, you will taking a great step in securing your financial future.
If you don’t have enough to look after yourself in an emergency, then you really do have to look at how some insurance products could help – and also get the financial plan reviewed! Call an Adviser at Bay Financial Parthers on 07 578 3863 to discuss how we can help you.
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