Having a buffer in your checking account can ease the anxiety of waiting in your next paycheck.
According to a recent Payroll.org survey cited, about three-quarters of Americans live paycheck to paycheck Forbes Advisor Guide on the subject. Studies like this show that individuals face challenges saving or investing money after they’ve paid their living expenses.
In such situations, the non-public finance concept of an emergency fund is commonly the main target. It has long been touted as a vital safety net, providing peace of mind within the face of unexpected expenses or lack of income.
But one other layer of economic security that is commonly ignored helped me ditch the paycheck-to-paycheck cycle and develop into a debt-free millionaire. It can also be a key component that I teach as a financial coach to assist people save and invest extra money to develop into financially independent. It’s called the money flow cushion – a lesser-known but equally vital component of economic stability.
How the money flow cushion differs from an emergency fund
Living paycheck to paycheck is a commonly used term, but it surely doesn’t necessarily mean you lack income. I’ve coached many individuals who make multiple six-figure sums – no less than $200,000 a 12 months – and still live paycheck to paycheck. Rather, the phrase represents a private challenge: If you didn’t receive your next paycheck for any reason, you’d experience significant financial or emotional stress.
A money flow cushion is a buffer of funds which can be available in your checking account and equal to 1 month’s value of expenses. Unlike an emergency fund, which is reserved for larger unexpected expenses like medical bills or automobile repairs, the money flow cushion serves a unique purpose. It is designed to be certain that you will not be living paycheck to paycheck and provides financial and emotional stability and security in your every day life.
Build your money flow cushion
Building a money flow cushion starts with a transparent understanding of your monthly expenses. Calculate the full amount you usually spend in a month, including the next things:
- rent or mortgage;
- utilities;
- Eat;
- Transport; And
- other essential health expenses.
Identifying these non-negotiable costs forms the idea for determining the scale of your pillow. Once you’ve a transparent overview of your monthly expenses, start setting aside money to cover them. This may mean reallocating a few of your savings or adjusting your budget to prioritize constructing your money flow cushion.
Benefits of a money flow cushion
One of the most important advantages of money flow cushioning is reducing financial stress. Knowing you’ve a buffer to cover your expenses gives you peace of mind and confidence, even within the face of unexpected financial challenges.
In addition, a money flow cushion serves as protection against fluctuations in expenses and lack of income. Whether it is a sudden automobile repair or a brief reduction in work hours, having that extra month of cash available to pay your bills can make it easier to pick up the slack without having to resort to bank cards or loans.
Additionally, a money flow cushion provides flexibility in managing irregular income. For freelancers, entrepreneurs, or anyone with fluctuating income streams, having a buffer in your checking account will help smooth out ups and downs and ensure you may cover expenses in lean months without dipping into savings or racking up debt.
Maintaining your money flow cushion
Maintaining a money flow cushion requires intention and commitment to maintaining the cushion at a level where you will not be counting on the subsequent paycheck to cover the present month’s bills. Start by automating regular transfers out of your important savings account to your checking account. This ensures that your pillow is repeatedly replenished without requiring your attention.
Monitor your spending no less than quarterly to make sure your money flow cushion stays sufficient to cover your monthly expenses. If you encounter unexpected expenses or experience a brief dip in income, proactively replenish your cushion as quickly as possible to take care of effectiveness.
But what about investing?
Despite its advantages, some people could also be hesitant to prioritize a money flow cushion. Concerns about missed investment opportunities or low rates of interest on checking accounts may prevent you from allocating funds to your cushion.
However, the financial security your money flow cushion provides far outweighs any potential downsides. It plays a vital role in ensuring you break the mental cycle of waiting in your next paycheck to pay the bills you inevitably have due that very same month. A niche is created between your survival instincts and your ability to think more strategically, allowing you to focus more time and energy on tougher financial goals like investing.
By prioritizing your checking account, creating and maintaining a monthly spending buffer, you may break free from the cycle of constant payroll and luxuriate in greater flexibility, security and peace of mind in your every day funds.
