Maintaining a Cash Buffer
Having an emergency cash buffer is always a good idea to help keep you safe and protect your credit report in the event of an emergency. Having a nice cash reserve will help you avoid having to take out a payday advance or use your credit card when you need fast cash to make a payment or pay a bill. I consider having a cash buffer as a form of insurance - it protects you in the event of an unfortunate event, however this form of insurance pays you interest, instead of costing you a monthly premium.
I like to keep about $4,000 in an savings account that I can use in case of emergencies. I determined this amount by using a few different ideas. One method of thought is that my maximum health insurance deductible is $4,000. In the worst medical emergency, I would have just enough in my emergency cash fund to pay for my medical bills. Also, I considered what would happen if I lost my income. I figured that four grand is enough to hold me over for about two months, and two months should be plenty of time to get back on my feet.
How did I start my cash buffer? I just saved the money up, stashed it away and forgot about it. I lived below my means for a while until I had enough money saved away.
So how can I afford to have that money just sitting in my bank account? Well first, it should not be sitting idle – it should be accruing interest. There are plenty of free online banks that have competitive savings rates. Just shop around online.
The question I ask is: how can you afford not to have that money just sitting in your bank account? Think of the domino effect if you are just barely getting by and something bad happens. First, your credit goes downhill, then you become overwhelmed in debt – things can easily spiral out of control. Not having an emergency cash buffer could end up costing you in the long run.
