10 Tips for Building a Financial Cushion

By Kat Tancock

PUBLISHED September 19
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5 MINUTE READ

One aspect of good financial management is knowing how much money is going in and out of your bank account, and when. But even the most organized among us drop the ball once in a while. To avoid overdraft fees or payments not going through, it helps to have wiggle room—more money in your everyday banking account than you actually need to cover costs.

This is what's called a financial cushion, and it's an important component of a healthy personal finance strategy. Here are some tips to get started.

1. Organize Your Budget

Before you can save, you need to know what you're spending. That means sitting down with your account statements, receipts and other relevant information to assess where your money is going, and how much of your income is going to daily expenses.

We know, we know—there are a million more fun ways to spend a Wednesday evening. But trust us, this step is worth it. If it helps, imagine yourself as the hero of a movie about a person who takes control of their finances and learns to live their best life. Pick a soundtrack and start your method acting.

2. Cut Costs

If you don't have a financial cushion already, we're going to guess you're spending at least as much as you earn. To become a savings superstar, you need to shift things so you end up in the black every month. In other words, you want to earn more than you spend.

Start by looking for easy wins. Are there recurring costs you can trim from your budget, like subscriptions to streaming services? Are there upcoming big-ticket items you can put off purchasing for another year, like a new phone? Can you shift a regular get-together with friends to someone's house rather than a pricey restaurant or bar? Do you have a credit card with an annual fee that you could switch to a no-annual-fee option?

When setting up your new budget, a good guide is the 50-30-20 budget rule: Spend 50 percent of your income on essentials and 30 percent on wants, and leave 20 percent for savings. Aim to cut costs where you can to reach this target.

3. Earn Some Extra Cash

For a quick infusion of cash to kick-start your savings, look for things you no longer need that you can sell. Whether it's a video game console you don't use anymore or clothing that no longer fits your lifestyle, you'll get much more value out of the money than out of the thing. (Bonus: more room in your closets!)

4. Make a Dent in Debt

Cutting back on oat milk lattes is one thing. But if you're carrying a balance on your credit cards, credit line or other kind of loan, you're spending money on payments (and interest) that could be going toward savings. In fact, you can think of paying down high-interest debt as its own form of saving, as it can dramatically reduce your future financial burden and help you free up cash for other needs.

As part of your new budget strategy, look for ways to increase how much you put toward this kind of debt so you can pay it off faster. And if you're paying a high interest rate on any of this debt, consider finding ways to transfer it to a lower-interest loan so a larger portion of your payment will go to reducing the principal.

5. Increase Your Income

This one won't work for everyone. But if you've been in your job long enough and it's been a while since your last pay increase, it could be time to ask for a raise. Research the right ways to go about it and book a meeting with your manager to discuss it. Maybe they'll say no, but there's also a chance they'll agree—and you'll have more money for your budget as a result.

And if they don't give you the raise you deserve? It could be time to go job hunting. Weigh the pros and cons of making a move, and look at what's out there. A little effort could turn into a huge reward.

READ MORE: How to combat the gender wage gap

6. Set a Concrete Goal

It's a truism of goal setting that you need an actual goal to succeed. "I'm going to save more money" isn't a goal; it's a wish. "I'm going to build a financial cushion of $500 in my checking account" is more what you're looking for.

7. Create a Plan

Once you've got that goal in mind, you can plan how you're going to get there. Let's say you're working on building a financial cushion and an emergency fund, and you have $200 per month to play with. Your plan might be to direct half of that into your financial cushion and the rest into your emergency fund.

If your target financial cushion is $500, that means it would take five months to get there. Then, you can shift your plan to putting the entire $200 into your emergency fund. Synchrony Bank's Savings Goal Calculator can help you work out the best plan for you.

8. Pay Yourself First

It's a rookie mistake—or perhaps a move only for the most disciplined among us—to think you'll save whatever is left at the end of the month. It seems like it's human nature to spend what we have, kind of like finishing the entire jumbo bag of chips. Instead, use the smart personal finance trick of putting aside money for savings first, before you get into spending. It's a simple way to organize your money that can reap huge rewards.

9. Make Things Automatic

No one needs more things on their to-do list, right? That's why it can be helpful to set up automatic transfers to your savings account so you don't even have to think about it. (This is also a key part of "pay yourself first" above.)

While technically the idea of a financial cushion is that it sits inside your main bank account, there's an argument to be made for temporarily shifting that money elsewhere as you build up your cushion. This can be a helpful tool to help you visualize how much you're saving.

10. Track Your Progress

As you work toward your "big" savings goal, there are small steps along the way that are worth celebrating—things like organizing (and sticking to) your budget, paying off your credit card bill in full and making it halfway to your financial cushion target.

Be sure to track your progress so you have a chance to enjoy that sense of accomplishment. You're doing awesome! Keep it up.

What is a Financial Cushion?

A financial cushion, also known as a cash cushion, is a kind of buffer. It's extra money in your daily banking account that helps cover unexpected payments or bridge the gap between money coming in and money going out.

For example, let's say you have a balanced budget. You know your paycheck will be directly deposited to your account on the last day of the month, so on the first of the following month (i.e., the next day) you've scheduled some automatic payments (maybe your rent and your electricity and credit card bills) that add up to about the same as your paycheck.

But what happens if there's a problem with your company's payroll system and deposits are delayed, or if you forget about the payments and also withdraw $200 in cash that day? If you're like many of us, your account will likely go into overdraft, resulting in hefty fees at best, or even bounced payments.

This is where a financial cushion comes in. By keeping a buffer of funds in your bank account, you can be confident knowing that these kinds of overdraft accidents won't happen.

What is a Good Financial Cushion?

How big a financial cushion do you need? It depends on your financial situation and your budgeting skills. If you receive regular paychecks and are good at tracking expenses, you can keep your cushion on the smaller side: as low as $100 or a few hundred dollars.

If you know you have a harder time staying on top of costs, a larger cushion would be better for you: perhaps $1,000.¹ And if you're self-employed or have irregular income, you might need an even larger cushion to cover larger gaps between deposits.

What's the Difference Between a Financial Cushion and an Emergency Fund?

Financial cushions and emergency funds are similar in that they're both cash you keep on hand in addition to what you need to cover daily expenses. But they differ in their purpose, and in where you keep them:

• Emergency funds are meant for emergencies, not day-to-day costs. Also known as rainy day funds, they're a safety net that you set aside in case of unexpected financial needs, or to cover living expenses should you lose your job. They're best kept in a separate bank account such as a high yield savings accountthat lets you earn interest on your cash.
• Financial cushions, on the other hand, exist specifically to ensure you can cover day-to-day costs (though the idea is not to spend them unless you need to). They are extra cash you keep in your main bank account—probably your checking account.

Ideally, you'll have both an emergency fund and a financial cushion. If you're just starting out on your savings journey, they might be small, but the goal is to have them grow over time. Eventually, you should have a financial cushion of up to $1,000 or more and an emergency fund that can cover up to six months of living expenses.

Look Forward to the Future

Saving money isn't a temporary thing—it's a way of life. Even in retirement, once your earning days are over, the habit of spending less than you have is one that will keep you in top financial shape. As for now? Imagine the possibilities you've unlocked by mastering the act of saving, and start dreaming of what you'll save for once your financial cushion is in place. Biopic credits: Roll.

Kat Tancock likes to think she'll be played by Scarlett Johansson in her financial journey biopic, but she probably won't be that lucky.

Sources/reference

1. Coldiron, R. This Is Why It's So Important to Have a Cash Cushion. Martha Stewart. Published February 25, 2021.

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