The Importance of a Cash Cushion

Establishing a financial cushion is one of the best things you can do for your peace of mind.  There is a surprising number of people who have virtually no financial cushion between them and the next unexpected expense.  Regardless of someone’s take home pay, there are a number of people who arrive at a balance at or near $0.00 at the end of every month.  Fighting to get out of this position is not only good for your financial future.  It is good for your peace of mind.

This Is Really The First Step

By financial cushion I’m not really even talking about the 3-6 months (or more!) worth of expenses most financial planners recommend having set aside for emergencies.  I’m also not talking about retirement savings.  I’m talking about an imaginary line that you don’t cross in your checking account on a monthly basis.  That is, the cushion between you and $0.  Maintaining that cushion is also a really good first step towards meeting that next larger goal of having a solid 3-6 months worth of expenses in cash savings for emergencies that most financial planners recommend.

Whether you are new to the workforce or a grey-haired veteran, creating a little bit of space between you and the need to pull out a credit card, scramble to transfer money from a brokerage account, or take a loan from a retirement account (yikes) is one of the basics of good personal financial management.  Your credit card is not a good option for covering unexpected expenses!  If you have never had a financial cushion, the peace of mind this creates is well worth the discipline of creating it.

Not Exactly An Emergency Fund

If the 3-6 month emergency savings is for bigger financial issues like an unexpected loss of income, the cash cushion is for much more routine unexpected expenses – like needing new brakes on the car or an unplanned airplane ticket home.

I can recall discussing this with a buddy when I was a young lieutenant in the army.  My friend thought I was crazy for not putting more of my available funds into the stock market.  I declared that for me, my zero balance was a number that still included a comma.  I wasn’t going to retain a balance lower than – say $5,000 a month – in case for some reason I needed some extra cash.

The cushion at the time was protecting me from an unexpected trip home, unexpected car maintenance, or a travel opportunity I just had to take.  The plane ticket and travel opportunity was pretty real as I was living in Germany at the time.  Of course, as I have gotten older, these lists of things have changed and the number that I consider my $0 is much higher.

Seems So Reasonable, Yet So Many Don’t Do It

Having a financial cushion between you and the next unexpected expense is a smart and reasonable thing to do.  Those unexpected expenses like car maintenance, home repair, or a surprise tax bill become less of a big deal if you have a little cushion between you and $0. Financial news sources that report retirement savings statistics often also includes the number of people who can’t cover a sudden $500 expense.

Undoubtedly, this unexpected expense ends up getting covered by the easy access of credit.  Slowly and surely, the credit card balance begins to grow as another unexpected expense comes along.  The funny thing about many of these unexpected expenses is that, well, they aren’t that unexpected.  If you notice, these unexpected expenses happen fairly routinely.

Assume that the unexpected expense is going to happen almost monthly.  Rejoice when a month goes by and there is no surprise three-digit expense you weren’t planning for.

By the way, your car needing a new set of brakes is not a surprise.  If you have a car, I’m here to tell you, it will need new brakes at some point.

Your water heater will go out, your dishwasher will break, and your dog will get sick.  Having a cushion allows for these events to become not financially significant.  They are still annoying, but not a significant event.

Creating some space between you and the next not so unexpected expense will create a tremendous peace of mind.  It is possible, you can do it, and you will be better off once it is done.