The Financial Cushion
Many people have certainly encountered the term “financial cushion.” Simply put, it’s a secured amount of saved money capable of covering living expenses in a situation where a person or household has no income. Its purpose is also to ensure survival in a crisis or job loss.
Some people conservatively estimate that such a financial cushion should provide financial security for approximately 12 months of monthly expenses – without reducing their quality of life. Others believe that 6 months is already sufficient, and “extreme” savers believe the financial cushion should cover at least 24 months of existence with zero income.
Financial Cushion – Basic Rules
The money accumulated in your financial cushion should generally not be spent unless absolutely needed. This is your “emergency fund” – remember that.
The money in your financial cushion should not be held in volatile assets like stocks, mutual funds, ETFs, or crypto. You need to be sure the value of your cushion is easily known and stable.
It should also not be held in illiquid assets like real estate, watches, art, or other collectibles. Selling these assets takes time, and if you need money “right now,” you’d likely have to sell them at lower prices, which is undesirable.
Liquidity and easy access to funds can be key for a financial cushion. Its foundation should be in Canadian dollars, held in a High-Interest Savings Account (HISA) or a Tax-Free Savings Account (TFSA) in cash equivalents. Or, perhaps, easily tradeable government bonds, to preserve the purchasing power of the money over time.
The Process of Saving Money in 6 Steps
Our simple 6-point plan will help you get started:
Set Clear Goals: Specific goals will make it easier to change old habits and guide you toward achieving desired results. Goals should motivate you. Car repairs or job loss aren’t strong enough motivators. Instead, focus on dreams you can fulfill thanks to your savings. It could be a vacation, helping loved ones, or a comfortable retirement. Don’t forget that at least short-term goals should be realistic and achievable. The feeling of success will further motivate you.
Family Budget: Are you single? Then you have an advantage. If not, create a budget together with your partner. Even if it’s rough at first, it will help you identify weak spots and unnecessary expenses. That’s already an important first step. You can keep a budget on paper, or use computer programs and apps. Just like the banks, you should update your budget regularly.
Track Your Spending: Budget analysis should have a concrete impact. Usually, this means reducing expenses. Focus on unnecessary subscription services, frequent but small grocery purchases, eating out, and impulsive buys of trendy products. Don’t forget about transportation costs.
Pay Down Debt: Get rid of unnecessary credit card interest and other debts you can pay off immediately. This saves you money and stress. If you have higher debts than your current savings, focus on paying them off first. Of course, you don’t necessarily need to pay off your mortgage early. Include it in your budget, but keep in mind that the sooner it’s paid off, the better. You can make extra lump-sum payments when you have unexpected income.
Automate Your Savings: Thanks to modern technology, you don’t have to remember everything and manually transfer money to your savings account. You can use banking apps and programs that will automatically make regular payments and transfers. This saves you time and minimizes the risk of forgetting in the daily rush.
Diversify Your Income: If you have free time, it’s worth looking for an additional source of income. If you want to maintain your current standard of living, such income can be used exclusively for saving. Thanks to the ability to work online, it doesn’t necessarily mean commuting and leaving home.
