Build a Cash Cushion

    Hi, this is Brittney Castro, Certified Financial planner, of Financiallywisewomen.com. Welcome to the 9 STEPS to Becoming a Financially Wise Women Video series.

    Whether you’re just starting your career, getting married, buying a home, raising kids, starting a business, approaching retirement, or simply taking control of your finances for the first time, now is the time to get the financial education you need to become a Financially Wise woman.

    Step 5 of Becoming a Financially Wise Woman- Build Your cash cushion.

    Also known as an emergency fund, your cash cushion will be there to help you when life’s unexpected expenses arise.

    Typically you want a cash cushion of 3-6 months of your committed expenses.  If you are self-employed or a business owner, you may want a cushion of 6-12 months.

    Why is a cash cushion so important?  Well, for example, let’s say you lose your job and it takes a few months to find a new job.  During this time, you still have to pay your bills.

    A cash cushion to cover 3-12 months of your living expenses will allow you to pay those bills while not incurring any debt or tapping into long term investments.

    Also, keep in mind having a cash cushion is important when working on debt reduction.  Most people allocate all access cash flow to debt payments as a way to pay off their liabilities faster.This becomes a catch 22.  They fail to realize that if they do not have a cash cushion, the next time a short term emergency comes up, they won’t have cash in the bank to get them by and instead resort to a debt instrument.

    So when working on debt reduction, make sure you are saving at the same time and building your cash cushion up.

    If you do not have a cash cushion yet, create an automatic savings plan to start building one today.  This is Brittney Castro and thank you for watching the 9 Steps to Becoming a Financially Wise Woman video series.  Tune in next time for Step 6.

     

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