Having a financial safety cushion in place is the right financial plan to have considering the several uncertainties that exist in today’s economy. The very first step necessary to secure your financial freedom is to put plans in place that guarantee that you can cope with unexpected expenses. This shields your overall financial plans and keeps them from deviating from your financial goals. An interesting fact is that China is one of the global leaders in household savings – largely because the country lacks a developed social welfare program and in case of a problem a person is left without state support.
So, what is a financial safety cushion?
In a way, you could consider your financial safety cushion as the financial instruments that you put aside and can survive on for a few months if you lose your source(s) of income. Your financial safety cushion’s main purpose is to provide you with a level of financial defense against unforeseen expenses.
Why create a financial safety cushion?
A financial safety cushion is a smart way of making sure you are not caught in an unforeseen financial surprise. Living from paycheck to paycheck is an awful and anxiety-filled way of living. Aside from the financial security that a financial safety cushion gives you, it equally helps you to simplify your finances. With your cushion well in place, you can take care of your recurring bills without having to worry about how to manage your next paycheck to fit.
How to build a financial safety cushion
It is important to understand the steps that can help you to put your financial safety cushion in place. For a variety of reasons, people usually want to be free from financial-induced anxiety and would prefer to have a safety cushion in place rather than leave everything to chance. Below is a step-by-step guide explaining how to build your financial safety cushion
Reduce your financial expenses
This is an obvious requirement for building a financial safety cushion. If you feel it is becoming a bit difficult to reach your financial goals, cutting down on some expenses can help you reach them faster. You can do this by looking at your financial spending and specifically looking for the expenses that are not necessary. You can cut these expenses from the big fees like house and car fees. You can also look at small expenses like Netflix, music, clothes, and so on.
Plan your budget
Creating a spending plan and sticking to it is probably the best financial advice you can ever receive. If you are having a hard time financially, a budget for your necessities is key to making it easy for you. A spending plan creates a spending route for you to plan how you spend your money and where to put it. A budget allows you to see where you are spending your money and where you can reduce your spending.
Having a budget also helps you to know how much extra you can put aside for building your safety cushion. This is necessary as you know the figure you are planning for your financial safety cushion and how long you will require to get to that figure.
Your emergency fund is the funds you put aside to serve as a cover for when life’s surprises come your way. This go-to stash of liquid cash is your cover to take care of unexpected expenses when they come up. In expert opinion, your emergency fund should be able to cover your living expenses for at least six months in a situation where you lose your steady source of income. This may be as a result of you losing your job, becoming ill, or any other emergency that may arise.
To manage an emergency fund for rainy days, you will need to do either one of the two steps below
First, create your emergency fund before your financial safety cushion.
The first step to achieving financial stability is to build your emergency funds. This is the minimum level you need to reach before you proceed to redirect your savings to build your financial safety cushion. After you reach the figure that you regard as your emergency fund, you can then redirect the savings to your financial safety cushion.
Emergency funds as a financial safety cushion
Your emergency funds can also serve as your temporary financial safety cushion. It is a quicker way to reach your financial safety cushion goal. As long as you can avoid spending your entire fund while taking care of your monthly expenses, you will be able to reach your financial safety cushion goal easier.
Everybody needs a cash cushion. The earlier everyone realizes this, the faster everyone reaches the financial goal that is intended to be reached. Everyone needs to prioritize reducing debt and sticking to a budget plan while committing to a long-term saving goal. You will soon realize that you sleep better at night once you have pieced together all the right financial cushion pieces for maximum protection.