What is a Cash Cushion?
A cash cushion refers to a financial buffer that individuals maintain in their bank accounts to cover unexpected expenses or to provide a safety net during emergencies. This amount of liquid cash allows for financial flexibility and peace of mind, as it can be accessed quickly without the need to liquidate investments or incur debt.
Importance of a Cash Cushion
Having a cash cushion is essential for effective personal finance management. It plays a crucial role in monthly budget reviews as it ensures that you are prepared for unforeseen circumstances such as job loss, medical emergencies, or urgent home repairs. Instead of derailing your budget, a cash cushion allows you to handle these situations smoothly.
How to Determine Your Cash Cushion
To establish an appropriate cash cushion, consider your monthly expenses and potential unexpected costs. A common recommendation is to have three to six months’ worth of living expenses saved as a cash cushion. However, this should be tailored to individual circumstances, such as job stability, health, and overall financial goals.
Building and Maintaining Your Cash Cushion
Regularly contribute a portion of your income to your cash cushion, focusing on building it slowly over time. During monthly budget reviews, assess your cash cushion needs and adjust your savings strategy accordingly. This proactive approach will help you stay financially secure and prepared for the future.