Living paycheck to paycheck is not only the issue for low-income earners but a predicament for a more significant number of Americans, some who earn six digits. In particular, a recent study claims that nearly 62% of Americans are living from one paycheck to another, making them anxiety-provoking, financially fragile, and only one unforeseen expense away from a catastrophe.
The good news? There is an underestimated financial strategy that might make you leave this circle of life sacrifice once and for all. It is called Building a Cash-Flow Cushion.
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One of the clients I have practice with coaches is at a high earning pace, but he still finds himself in a situation where he counts days by the next payday. Why? Exclusively planning your monthly budget is not enough as all the money you make is spent before it’s in.
Lack of a financial cushion causes you to be one step behind, constantly in fear that you may not get your salary next time. This kind of thinking impairs your ability to save, invest in a profitable asset, or repay debts in a productive way. The trick is to give yourself some manifold, and do you know why?
What is a Cash-Flow Cushion?
A cash-flow cushion, in simple terms, can be referred to as an extra layer of money—definitely, the amount that can take care of a month’s duties—which is stored in your checking account and is available at any point in time. This money is not your rainy-day fund. It isn’t pressed into service for health problems from left field, unemployment, and any other crisis situation. It is set aside for you to pay the usual bills without being frantic that your next paycheck will take forever to come.
As an example, suppose if your fixed expenses are approximately $3,500 per month which covers rent, utilities, foods, and transportation then the primary objective is to keep at least $3,500 right in your checking account. Once you put your savings in such a way that you don’t have to pay your bills according to your payday anymore, you will be completely indepe!
Why This Trick Works
Forget the headache of whether your paycheck will arrive before the mortgage is due you have this cushion. You’re giving yourself freedom and flexibility. A survey by Bankrate indicated that the majority of people in the US, (66%), would not be able to cover even one month of their lives if they ceased to be employed. Now you can put all your worries behind you without credit cards or emergency funds.
Beneficial results of creating a cushion include the following:
- Leading to a release of the immediate financial tension away.
- Preventing overdraft fees.
- Breaking the habit of using credit cards as a source of funds during difficult periods.
- Making budgeting less restrictive since you are already head rather than a deficit.
How to Start Building Your Cash-Flow Cushion
The first thing to do is to find out the real monthly expenses such as rental, utility bills, weekly food, insurance and travel, and meanwhile also the necessities.
Example Breakdown:
- Rent: $1,800
- Utilities: $500
- Car Payment + Insurance: $560
- Food: $400
- Health Expenses: $350 Total Cushion Goal: $3,610
What is the next step after learning your goal? Our advice is to do regular deposits into your checking account. It will not be feasible to do this in one night. A mere saving of $100 to $200 for every paycheck brings the desired objective nearer to you.
To get them, however, you can have a $600 challenge per month. This is to be achieved mainly by reallocating some money from your savings every month until that goal is reached. Automating the process by using an automatic transfer option helps to eliminate human errors and enables to accomplish the goals regularly.
Why This Should Come Before Debt Payments or Investing
Do you wonder if this cash fund is getting in the way of your paying off debts or creating wealth? On the other side, when you don’t have the money you need, you tend to use credit cards or take out more loans, thus getting yourself into a more serious financial bind weekly rather than creating a measurable and worthy wealth building strategy.
Here is a common piece of advice I give to my clients:
“Debt is your past, investing is your future, but your cash-flow cushion is your present.”
Breaking the vicious cycle of living from one paycheck to another does not only empower you to handle the financial burden more easily but also provides you with the opportunity to invest your money in a more positive and secure way.
Make This Your Priority
Rest assured even though it might take you a month or two to get the money, you will be feeling the incomparable release of the fact that you will have enough money no matter what your payday is and the relief you will experience is really helping you to sleep at night. The best part is, when you shift your daily money habits and these practices become the regular thing, you will indirectly notice your finances are taking the right direction.
If you have been thinking of ways to stop living paycheck to paycheck, say hello to this. Your first small step? Begin with saving the money that you would usually use, spend it on the more demanding items, into your checking account and observe the change.
