At some point in your life, whether you are in your twenties or thirties or beyond, you start to appreciate the value of squirreling your cash into savings and investments. Investing surplus cash into various avenues is a smart way to build a passive income and have a way to draw cash in later life, but what do you do after your nest is full of money eggs? You could have set up your whole financial future in various ways through passive income streams, but what about your financial present?
You need to look at your finances and ensure that you have a way to cushion yourself should things go wrong right now. You may have access to homeowner loans or credit cards, but you need to have a game plan in place just in case.
Things happen – life happens, and you need to be prepared for it. There’s no use having a financial future mapped out for yourself but have no way to support yourself should you lose your job or go through a relationship breakdown and lose your financial support.
The first thing you need to do about your financial cushion is to recognise that you need one in the first place. Everyone out there needs to have an emergency savings account set up. If you don’t you’re going to have to draw on your investments and liquidate certain assets just to get by, and the whole point of investing is not having to do that. If you plan ahead, you won’t have this problem.
Everyone should have their magic number. Usually, if you sit down and calculate how much you would need to survive for three to six months without a job, you can find your magic number.
This is the amount that you should have in an emergency account at all times to be accessed if you really need it. For some people, having $20,000 is a lot of money, but then for others it’s just about enough to cover the basics. Have a discussion with your family and decide on the magic number that is right for you.
Be honest with yourselves, though. The last thing that you want to do is downplay how much you would need in an emergency situation. Have a little common sense about how big your financial cushion should be. It should be enough to catch you in any situation that sees your financial situation precarious and worrisome. You don’t need to worry if you have the right financial cushion ready to catch you and your utility bills.
Ideally, you could go through most of your life not needing the cushion. That money could sit in an account and accumulate interest. You could choose to spend it on a rainy day, or you could pass it down as an inheritance to children. Either way, it’s far better to have the cash sat there and never use it than use it and then end up needing it.
Sometimes though, you may need the cushion. You may have a college goer needing a new car. You may need to care for an elderly relative and have no surplus cash to help support them. The cushion is there for when you need it, so you should never really feel bad for tapping into it as you need to. Don’t make it a permanent tap, though. Whatever you need, you need to replace later. The reason? It’s an emergency cushion not a daily dipping account to look at. Always have a plan to top up the cushion account so that you can keep the emergency savings ready.
Having an emergency savings account allows you to prepare for the unexpected in the future. No one can see what’s coming; economic crash, emergency house move due to disaster in the home or even a car crash. If you have a cushion ready to rescue you, you can feel a lot less stressed when situations like those crop up.
You don’t have to panic and feel scared about how you will survive if you have a cushion ready to catch you whenever you fall. Resting easy and focusing on living your life is the best thing to do, and you can do that far easier when you have an emergency cash cushion ready to grab you when the tides change. You cannot plan for something you cannot see coming, but you can be ready for anything in an emergency account.