Let me tell you a secret: You do not need a million pounds. You need a cash cushion.
What? Yes. We all think we’re going to need a ton of money to do the things we want to do. But truth is, you don’t need a ton, you just need some.
That’s what a cash cushion is; some money ready for you. You might have heard of a cash cushion as an emergency fund – which it also is. However, you don’t need to use your cash cushion only for emergencies – as a young adult who might not be making much, a cash cushion has a lot of other amazing purposes. 🔥
Most finance gurus recommend aiming for 6 months of expenses – but just starting with 1 month can be enough, and then build it up to 2, 3, 4 months.
And here’s what you can do with them…
1. Cover unexpected costs
No matter what age you are, you will know how stressful it can be have an unexpected cost: a broken phone, a broken laptop, or even something more serious such as a medical expense or a car breaking down.
It’s mighty stressful, which is why your 6 month cash cushion can literally be a life saver. You’ll sleep better at night knowing if something happens, you’re going to be ok.
This is why it’s recommended to put your cash cushion in cash, in a separate bank account. Yes, it won’t be gaining interest, but it’ll be easy to access in case of emergencies and will allow you to sleep better at night. 😴
2. Capital – a 0% loan to yourself
As a twenty something year old that doesn’t make much, I usually wouldn’t be able to afford a big trip or holiday. But last NYE I went to Dubai and then Turkey – the trip was pricey (more than expected 🙄), BUT I was able to afford it thanks to my cash cushion. 💁♀️
This cash cushion literally provides me with a 0% loan to myself whenever I need a bit more money upfront.
This is also life changing. It means you have enough money for that extra rent deposit. It means you have enough to pay for your driver’s license. It means you have enough to visit your friend in Mexico. It gives you freedom and flexibility.
The important thing here is to have the discipline to pay it back every month. I take a percentage of my earnings and pay back my cash cushion every month – without interest 😎
3. Job problems
You got fired. You can’t find any clients. You’ve just arrived in a new city. Whatever the reason, you’re currently not making money and need to survive.
Who should I turn to? Who will help me get started? Who will feed me? Yep, you thought right: Cash Cushion. 🎁
A cash cushion is essential when going through money problems – less stress, more time. And while you’re building those essential money making skills, you can live on your 6 month capital. Of course, it does mean that after 6 months you will run out of money… so make sure you get something lined up pronto.
But this is why I never stop contributing to my cash cushion. Every month I set a percentage of my income to Cash Cushion, but once I hit my 6 month mark I keep building it. I’ll only stop when I’m 100% comfortable with the amount. 👌
4. Mini retirements
Mini retirements are a cool term that really mean ‘gap years’. This mini retirement of one year (or however long) could be whenever – after high school, after university (if you go), between jobs.
Mini retirements are for when you feel like taking a break from life and want some time off.
And who will you turn to? Cash Cushion 🎁. A 6 month cash cushion might give you a 3 month mini retirement, but imagine what you could do if you had a 1 year cash cushion, or a 16 month cash cushion! Freedom 😍.
The great thing about being in this situation is that you’re not relying on anyone for money. Not your boss, not your parents, not a client. Just your very own Cash Cushion built by you.
Why 6 months?
Cool. I want to start building my cash cushion. Where do I get started? Why does it have to be 6 months? The finance gurus recommend 6 months because this is normally enough for not too big emergencies and for a few months without earning. But really, it depends on how much you make and how much risk you want to take on. Here are two arguments against cash cushions:
I could be gaining interest with investments: Yes, you are right. However, fluctuations in the stock market make this capital unreliable. Also, selling investments take 3-4 days and by the time they reach your bank account your car will have lost another wheel. Investing is one thing, a cash cushion is another. You want to be both investing and building your cash cushion. Grab a percentage of your income, keep allocating a bit to each. Trust me, the peace it will bring is priceless.
I could just use my credit card and then pay it off: Credit cards are a great strategy to cover emergencies and small expenses. However as a young person, my credit limit is pretty low (mine is currently £1,300), which isn’t really enough. A good tactic would be to use a credit card and then sell investments to pay the card back. It’s a great strategy, but with my credit limit and investments, I’m better off with Cash Cushion. 🎁
So as you can see, your cash cushion strategy can vary depending on what you make, how much risk you want to take on and what makes you sleep better at night.
A good place to start: open a bank account in another bank (or a neobank, if you want to get it done in 8 minutes 😛) > don’t get the debit card if you don’t trust yourself with not spending > allocate a percentage of your income to that bank account (5-10%) > keep contributing every single month until you feel comfortable. Ta-da, you now have your very own Cash Cushion 😉
Cash cushions really are freedom. Cash cushions are flexibility. Cash cushions allow you to keep your head above the water, and to sleep well at night. On the search to fulfilment you don’t need a million pounds, you need a comfortable cash cushion that allows you to do what you want. That allows you to quit that horrible job, that allows you to travel for 3 months, that allows you to buy a plane ticket to Malaysia. Once you discover the power of cash cushions, your life is changed forever. ⚡