The Financial Cushion: Why You Need One

by Jason Unger

For your central checking/debit account, it’s crucial that you have a financial cushion as a safety net for your transactions.

What’s a financial cushion? An amount of “extra” money to ensure you don’t run out when all of your automated transactions occur.

By having this safety net in your main checking account, top advisors with financial degrees agree that you’ll avoid the worst-case-scenario where your automated payments and transfers and flex spending wipe out your entire balance before your next deposit.

If you’ve scheduled your payments and transfers far enough apart each month, it’s unlikely that you’ll need to go into your cushion. But it’s certainly worth having that safety net — just in case.

How Big of a Financial Cushion Do You Need?

Your financial cushion can vary from a few hundred dollars up to $1,000 or so.

You should consider two things when deciding how large a cushion you need:

  • how big your transactions are
  • how worried you would be that your balance will reach zero before it is replenished

Like most other personal finance decisions, it’s up to you to figure out your own tolerance.

My financial cushion tends to be around $1000. Since I’m unlikely to get hit with an immediate need for more than $1000 (and that’s likely stretching it), I’ll have that money to avoid any overdrafts and not have to wait the 2 to 3 days for money from my emergency fund to transfer.

How big is your financial cushion? Let us know in a comment.

About the author: Jason is the author of Automatic Finances: 17 Days to Your Financial Freedom, a guide to automated money management. He started investing thanks to a free lunch, and after finding out how he was getting the short end of the stick, he sought out how to do it right. More »

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