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Financial Cushions: How to Protect Your Future

Updated: May 9

Publication date: 09.10.2023

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What Is a Financial Cushion?

financial cushion plays a vital role

Managing personal finances effectively is crucial for a stable future. This is where a financial cushion plays a vital role as it is a key to achieving autonomy within the household budget. In particular, it is an emergency fund that people set aside for unexpected expenses. This is because it prevents them from going into debt when you have a financial crisis. Additionally, it helps cover different unexpected costs. People who have such a financial safety net have greater freedom.

The Importance of a Financial Cushion

A financial cushion is crucial because it helps reduce stress associated with financial concerns. This is because it provides protection in the event of various emergencies. For example, it can cover sudden expenses like medical bills or car repairs. Additionally, it gives individuals the freedom to make choices about their careers. It is because people don’t need to worry about losing their job. Last but not least, having extra money offers the opportunity for investment, potentially leading to the growth of assets.

The Biggest Pros of a Financial Cushion

Having such a financial buffer has several advantages. Firstly, starting to save for retirement at a young age helps to be financially safe and independent in the future. What's more, if you begin saving money early in life, you won't feel the pressure to set aside large sums in a short period later on. Thanks to that, you may have a more comfortable retirement without relying only on the government. Lastly, when you are young, you can afford to take more risks when you invest as you have a longer time horizon. In other words, long-term investors typically take risks and receive greater rewards.

How Much Money Do You Need?

The calculation of your ideal financial cushion depends on your unique financial situation. It is said to set a goal of saving an amount that can sustain you for three to six months without income. However, this sum can vary based on individual circumstances.

Those are elements such as job security, family size and access to alternative financial assets. People with secure incomes and fewer dependents might incline toward a three-month reserve. On the other hand, those with greater uncertainty should aim for a more extended cushion, preferably a six-month mark.

Calculation of your ideal financial cushion

How Much Time Do You Need?

The duration of gathering the sum for an emergency fund can depend on our age and financial goals. For younger individuals, it's advisable to start by contributing a higher percentage of their income to the emergency fund. Then, gradually reducing this contribution while preserving and replenishing the fund. Generally, it is said to dedicate 10-15% of your monthly income until you reach your desired savings goal. At the very least, consider contributing a minimum of 5% of your monthly income.

Ways To Build a Financial Cushion

Ways To Build a Financial Cushion

There are several efficient ways of building a financial cushion. It is very essential to create a budget as it helps identify saving opportunities and allocate funds. Automated saving contributions can be useful in this case of saving. Also, a side hustle or extra income stream could improve the cushion. When it comes to debts, you should prioritize paying down high-interest ones first. Thanks to that you could have more funds after that.

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