If there was one realization a lot of people made as the health crisis swept through the nation, it was the importance of having a cushion fund. Commonly referred to as your emergency or reserve fund, the main goal of this account is to help bail you out when you are going through tough financial times. When unexpected situations sweep you off your feet, this account serves as a cushion to soften the blow.
If you lost your job, this fund would help cover and pay for all the essential purchases you need to make at home. All while you get the chance to sort things out. It can be exploring other openings in your company, applying for a new job somewhere else, or maybe even starting a business. You get to do these without worrying too much about putting food on the table.
Your cushion fund will give you months or financial reprieve, depending on how serious you were in strengthening it. It also helps if you consciously find ways to stretch the fund to be able to cover more months of expenses. This can help especially that you never know how long your financial situation will negatively impact your income.
But at a time where everyone is just coming off one of the most challenging years, how do you even start saving for this? You could even still be trying to adjust to your work-at-home status as Nielsen shared that about 2 out of 3 Americans have begun working remotely from home. Your children could also be studying at home. But there are ways to help you get started without pushing you to adopt extreme measures. Here are some of them.
Funnel stay-at-home savings into your cushion fund
Once you started staying at home, there were automatic savings right out the bat. For you to identify these areas, you need a comprehensive household budget, to begin with. Your budget will give you a bird’s eye view of your income and more importantly, your expenses. This is a great way to identify how your expenses have changed now that you are working from home.
There is a good chance that you will have automatic savings from how your budget was when you were still going to the office compared to working from home. For one, your transportation cost should definitely go down. You also do not need a lot of new clothes since you will be working from home. This can also lower down your expensive coffee cups several times a day and dining out with friends for lunch.
With this, you can quickly increase your savings by putting the money you save into your emergency fund. These are savings that come naturally from working from home and they can be a good way to get you started. It can be a good start to give you that nudge you need to help you start and build up your savings.
Pay the account first
If you want to start saving for your cushion fund, you need to change how you look at your budget especially your monthly payments. What do you prioritize every month when it comes to your payments? Is it high-interest payments or the ones with the smallest amount? Or do you prioritize your house payments? Have you considered paying yourself first?
Yes, you can also pay yourself every month much like how you pay your lenders. This is one way to ensure you save for emergencies every month. Treat the account as a debt payment and put it high up your priority list. Once you set money aside for this fund, forget about dipping into it. Much like how you cannot really ask for your debt payments back.
It might take some practice but it can be a good way to help force you to save money. Put it in the account and forget about it. Just focus on the amount you need to put together again for the next month. This “save and forget” approach could surprise you when the time comes you finally need the money in the account.
Review recurring charges
One way to help you strengthen your cushion fund is to look at your expenses again and identify recurring charges. These would be automatic payments that come out of your account every month. Normally, automatic payments are a good idea to help you stay on top of your payments. With enough balance on your account, you do not have to worry about missing a due date.
But it helps to go over and review these automatic payments from time to time. You might have enrolled them in your account when your income was stable. Now that you want to focus more on saving money, check your recurring charges. There might be some payments you can lower down or do away with completely.
Go through each and every one of them and ask yourself if you can either lower it down or just cut it off. You might still be paying for a gym membership you have not been using for months now or a magazine subscription you barely read. You might think that some recurring fees are just small but you might be surprised what they total to at the end of the year.
Increase insurance deductibles
One of the ways you can put more in your cushion fund every month is to look at your insurance deductibles. Healthcare explains that deductible is the amount you pay before your insurance covers the rest. If you believe you can manage a bigger out-of-pocket expense in the future, you can choose to pay lower deductibles. This can free up some of your funds which you can put towards your emergency account. But take caution because your insurance can also help you get out of a bind in the future.
Forget about windfall money
Windfall money can come in various shapes and forms and it can even come when you least expect it, which is good. A bonus at work will always bring a smile to your face. Even an increase will surely make you and your family ecstatic. This goes for your tax refund check as well where you do not really have an idea if you will get one or how much it would be.
These sources of windfall money can do wonders for your cushion fund but only if you know how to use them well. Oftentimes, excitement in receiving unexpected money can lead you to quickly think about your wants. Besides, that money was never part of your budget. So using it to buy what you want will not hurt. But what if you use it to help you strengthen your emergency fund? You can put a big chunk of it towards that fund and reward yourself with a small percentage of the money.
Gamify your goals
This can be an exciting part of your journey where you gamify and put rewards throughout the process. Along the way, reward yourself when you hit certain markers. If you hit a target for the week, treat yourself to ice cream. You can also do it monthly or every quarter. One thing to remember though is to be conscious about your reward. The last thing you need is to undo all the hard work you put into saving money by wasting everything on the reward.
Living below your budget can give you the chance to free up some of your income to go towards your cushion account. This is a good way to show your creativity and save for future needs as well. If you seem to spend a lot on family entertainment like movies or trips, why not bring have that experience right at home? Set up a movie night in your backyard with free-flowing popcorn and juice for the children. Your imagination is your only limit.
Your cushion fund is one of the most important savings you need to focus on this year based on the lessons from the pandemic.