The other day trying to get my son out the door to baseball practice, I was emphasizing “we have no more buffer!” In other words, move it! I then had to explain to him the concept of “buffer time” and how it’s almost always used up by something unexpected. Because something unexpected is to be expected when leaving the house withchildren.
Indeed, a key element of getting anywhere on time with kids is building in ridiculous time buffers. I finally get places reasonably on time with them now (7+ years into parenting) becauseI aim to ‘head downstairs for shoes on’ about an hour before we need to be at a place that is a fifteen minute drive away. Not exaggerating.
The same is true about our money. Yes, you need a smooth running systemto handle your cash flow. You must know where your money is going.
BUT there is constantly unexpected stuff that affects our money. And, though I love a well-oiled system and spreadsheet, it is inefficient to try to control every last penny.
Therefore, you need buffer money… or in another words a financial cushion (or five).
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But what’s a financial cushion? It’s buffer (or extra) money to protect against account overdraws, or effectively, running out of money in any way, shape, or form.
In this post, I share five types of financial cushions to build into your money management for smooth running finances.
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What's In This Post
#1 – Budget buffer
In my budgeting system, the burn rate budget, you identify a monthly spending cap for all your spending. But before calculating what your weekly burn rate should be to stick to that cap, you subtract off a buffer. Typically 1/3 of your total spending cap is a good buffer. The more you use this system, the more you’ll identify those unexpected hits to your spending and hone in on how big your buffer should be.
The buffer in the spending budget is critical because you might be super on top of your day to day groceries, gas, and fun spending… but then the annual Prime membership bills to your credit card too and just pushed you $120 over your cap (If you receive government assistance, you may qualify for 50% off monthly Amazon Prime- check it out). Or you constantly forget to include the monthly auto-charge to your credit card for your kids’ swim lessons. The buffer helps you deal with all this stuff.
More meticulous planning can help lessen the unanticipated stuff of your spending life. But you only want to use but so much time hyperanalyzing your spending. And even if you do, the unexpected still happens. Hence, you will always need a buffer. Worst case scenario, you don’t need the buffer one month and you get to bank that amount you set aside. Hope for the best, but be prepared for the worst.
#2 – Emergency fund, your formal financial cushion
The classic financialmandate to have an emergency fund is basically a really big buffer. Something to absorb the big unexpected hits that shock you, like broken furnaces, major vehicle repair, illnesses, and income loss. These big expenses can be ruinous. Therefore, the emergency fund is a big financial cushion that is absolutely essential.
Personally, with solid insurance, some home equity, and two reliable jobs, I have viewed this bucket as $10-15,000. Gasp! I know, people just starting out on mastering their financial journey are like, I’ll never have $15K in the bank just sitting there, you’re nuts! And meanwhile, the personal finance gurus are like, you said inanother postyour mortgage payment is $2,500 per month for P&I alone. Combined with otherfixed expenses, there’s no way your emergency fund should be less than $30-45,000, you’re nuts!
To the former group, I say “You’ll get there!” and to the latter, I say “I have my reasons & my life isn’t a cookie cutter.” Can’t win ’em all right? With leaving my traditional job, that emergency fund threshold for us now is $30,000. So you have to evaluate your own situation.
Ultimately, you just need to start somewhere to build an emergency fund. If you have nothing, get $1,000 in the bank set aside for true emergencies. Your next goal could be $5K, then $10K, and so on. Every step on the journey is essential.
#3 – Layered savings account
In my three-layered savings system, the second layer of money for irregular expenses helps turns the unexpected into expected. By thinking through the likely big ticket expenses you will face in the year ahead, whether bills or planned spending, it takes the strain off the other buffers.
So, this more informed financial cushion helps keep you from dipping into your emergency fund for every stinkin’ thing that comes up. It’s basically a first-line buffer for the last line buffer. Even in my explanations of the examples of things you may want to consider when estimating your cash needs for this layer of savings (annual vet visit, annual memberships, car maintenance, etc), it overlaps a lot with examples I cite for the spending cap or budget buffer. This kind of redundancy (or backup) helps you always have enough… but without having to micromanage.
#4 – Being a month ahead of bills
A crucial financial cushion built into your money management is to pay all bills with last month’s money. January’s income pays February bills, February income pays March bills, and so on.
Being a month ahead in this way gives you time to make adjustments whenever you need to. In doing so, when the unexpected (or a flat out mistake) happens, you are still in control. Therefore, paying all your bills (including funding your day to day spending) is already covered from last month’s income. This willeliminate late bill payments, late fees, knocks to your credit, and lots of undue stress.
In effect, this type of buffer money (one month’s income already in your account that isn’t obligated until the following month) switches you from being on money defense, constantly watching payroll dates and billing due dates, to having the space and freedom to strategize your financial offense. And it’s a built-in buffer equivalent to a month’s pay for your checking transactions throughout each month. Major game changer.
Find out how to get your checking account a month ahead here.
#5 – The checking account money buffer
Stocking a savings account directly linked (meaning, at the same bank) with $500-1,000 is a useful cash cushion for your checking account. I prefer to keep our primary savings in an online bank account that typically (in a different economy) earns a higher interest rate, but, more importantly, is a 2-3 day transfer away. This separation of your savings helps keep that money protected for well-thought out uses.
But to help handle potential problems that might pop up in your checking account, stashing $500-1,000 aside to a directly linked separate account makes a nice cushion if you need it. I consider it a part of our emergency fund, just a portion stored in a slightly different place.
Financial ebb and flow… buffers make this easier
I think some of the frustration with managing personal finances may be it feels like there’s always something knocking you down. Like, what’s the point of getting ahead when then my spouse lost their job. You feel back at square one. Sometimes, it feels like you just can’t win.
The thing is setbacks will always happen. Building in multiple financial cushions as part of your whole management system helps alleviate these hard knocks. This is how some people seem to not have these problems- they have them, they just have a system that can manage them.
You get hit with an unexpected $800 car repair. When you can absorb $200 of that into your budget buffer. And another $250 from your irregular expenses for expected vehicle maintenance & then just $350 from your emergency fund. Well, it starts to feel a bit more manageable, thanks to having multiple financial cushions in place. It’s spreadingout the financial pain. And when the good comes along (a nice tax refund, etc.), you load that right into your savings account to keep those buffers well fed.
The natural financial ebb and flow of adult life becomes manageable and is just something to get used to. You can get more comfortable with it by having these buffers and being comfortable using them. The buffer money is there to make this all easier.
Key Takeaways
Early in adult life, our list of expenses is relatively short and our finances rather uncomplicated. But that changes. As life becomes more complex, ensuring you build in lots of financial cushions to your money management scheme is as important as time buffers for leaving the house on time.
Plan what you can. Estimate the rest. Learn to expect the unexpected. And then sit back and relax knowing you can rely on your multi-layered money buffers to keep you covered.
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