The Immediate Benefits of Keeping a Cash Buffer in your Bank Account
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Imagine a life where you are so comfortable with your finances that you didn’t realize it was payday last week, until just now. You have your bill payments and savings transactions automatically withdrawn from your checking account on a regular basis. You aren’t stressed because you realize the immediate benefits of keeping a cash buffer in your bank account. No need to plan when payments come out versus when your paycheck is deposited. You know you will always have enough of a cash buffer to back you up and cover your expenses. If you think this is a dream world, keep on reading to learn the immediate benefits of keeping a cash buffer in your bank account.
Spoiler alert: get ready to say goodbye to living paycheck to paycheck.
Your Life Without a Cash Buffer
Major car repairs, broken phone, or other unexpected costs seem like mountains between you and your goals? Can’t afford to stay home when you are sick because your job doesn’t offer paid sick days? Watching your checking account go up and down each week as you try to manage your minimum balance for upcoming bill payments?
If any of the above resonates with you, you are not alone. I had my first good job out of university and I was still living paycheck to paycheck…until I learned about the concept of a cash-buffer. Keep on reading to learn the immediate benefits of keeping a cash buffer in your bank account.
I was Living Paycheck to Paycheck
It used to cause me great anxiety to try and determine whether or not I had enough funds in my bank account to pay my upcoming credit card bill. I wasn’t sure if my automated payments could be withdrawn without cutting into my overdraft (and being awarded hefty fees). Like clockwork, I would anxiously await payday wondering whether I should transfer $100 from my savings account into my checking, just to be safe from dipping below $0 in case the withdrawal occurred before my paycheck was deposited.
I went between being too scared to look at my credit card balance for weeks on end, and obsessing over whether I would have enough in my account until payday. If I thought I had extra cash, I would get excited and put it toward debt.
There were so many once-a-month bill payments that when I thought I had extra money, it would come back to bite me. I often shifted money from account to account to make sure I was covered! I constantly felt like I was spreading myself too thin by keeping such a lean amount in my checking account. Even though I knew I was putting the extra toward debt. I was able to resolve these stresses by leaving extra cash as a buffer in my bank account.
“I constantly felt like I was spreading myself too thin by keeping such a lean amount in my checking account”
What is a Cash Buffer
A cash buffer is simply a set amount of money that you leave in your checking account at all times, as a buffer to keep you from hitting $0 or going into overdraft, AKA “the new $0”.
For example, I have a $1000 cash buffer in my account. This is enough to cover a whole round of bi-weekly bills so I can last until the following payday if I’m stu, or so busy that I don’t realize I’m not caught up. The point of having a cash buffer in the first place is to reduce worry about not having enough money in your account. I treat that $1,000 as my new $0. So just before payday, I tend to hover around that $1,000, plus or minus $150 or so. I’m TOTALLY fine with it dipping to $800 if it ends up that way from time to time. Why? Because that’s the whole point. I don’t notice my balance until I go to check it. It goes up when I get paid, so I try to estimate how much I need in there until next payday.
Sometimes I estimate a little low, sometimes high. That’s the beauty of a cash buffer though…I’m generally not too concerned since I know I have my buffer in place and it will be topped up at payday.
Using a Cash Buffer to Simplify and Take the Stress out of Bill Payments
I wasn’t worried about whether or not I was overspending, because I had been using You Need a Budget (YNAB) and was sticking to my plan. I was also saving and making more than my minimum debt payments. However, the timing of transactions and having enough money in the account was my biggest struggle. There were just too many transactions to keep track of. I know I could simplify, but I was trying to maximize debt payments and savings. However, it had proven unpredictable as to which days the transactions will actually go through and remained a constant challenge. One day, I heard Andrew from the Listen Money Matters Podcast talk about how the goal should be to hardly ever have to think about money at all. Because once you have it all figured out, it should be straightforward. This hit me like a ton of bricks.
He was basically saying that you know you’ve got your finances figured once it is all set up and can function in the background without you. It may take some time to figure out a system that allows you to do this, but it became my new goal. I felt that a cash buffer gave me a lot more space when it comes to how much I think about money.
You’ve heard how anxious it made me to watch my accounts each week and a cash buffer, in addition to having an emergency fund and sinking funds, helped me to not have to worry so much. Now I just check in to make sure nothing unexpected is going on.
Using a Cash buffer to Help "Cash-Flow" your Unexpected Expenses
The car needs a major service, the hot water tank broke, or you need to pay for an unexpected flight to visit grandma during her last few days. No one is immune from irregular and unexpected expenses. While a cash buffer isn’t the best tool for cash-flowing unexpected costs, it will help you get to a place where you can start to save and budget for them.
I personally was able to wrangle my larger annual bills such as car insurance and holiday gifts by budgeting a smaller amount bi-weekly, into a sinking fund. This doesn’t mean I can get away from unexpected expenses. I may budget for vehicle maintenance, but that doesn’t account for when we go overboard with a birthday gift, or buy a bike to cut out commuting costs.
However, since a cash buffer is extra cash sitting in your account, it can be used to “cash-flow” smaller items you forgot to budget for. Let’s say you go get a haircut, have to replace the battery in your car that month, and it turns out you need new shoes. This is maybe a bit more spending than you anticipated. You may have to put less money away toward debt this month, but your cash-buffer is real money that can absorb those costs, while still having confidence that you get to start fresh on Payday.
How Big Should a Cash Buffer Be?
- $1,000 is the new $0: $1,000 is what I always recommend to start with for your sinking fund because it is easy enough for almost anyone to build up to and manage. Baby steps. So it may take you 6 months to save up your $1,000 sinking fund, but the time will pass anyway and in six months I am sure you would rather be more in control of your finances than where you are now. If $1,000 seems impossible, start with $100, $200, $500, and then work your way up to $1,000. Avoiding overdraft fees is paramount.
- Why $3,000 is better than $1,000: we can avoid using our emergency fund for small inconveniences such as under-budgeting for vehicle expenses one month, or replacing a phone without buying into a contract. Ideally your emergency fund is kept available for actual emergencies and not depleted over minor inconveniences. If you aren’t already there, eventually you will be able to cash-flow such expenses. Having more of a cash buffer helps keep your emergency fund untouched.
- As we focus on paying off debt, our own sinking fund is only $1,000. But we also have a growing emergency fund (always at $2,500 minimum). Once our debt is paid off and we are focused on investing I will be putting more toward our savings buckets. The end goal once we have no debt would be to utilize a $3,000 sinking fund. Personal finance is personal, and all you need to do right now is to commit to working toward that $1,000 cash buffer. Even if it takes you a little while to get there.
Why You Should Set Up a Cash Buffer Now to Stop Living Paycheck to Paycheck
By having a cash buffer in your main bank account where bills and savings are paid from, you will stop living paycheck to paycheck and gain control over your finances. It will give you the following benefits:
- You will stop worrying about how much you need in your account on a given day.
- You will never worry about whether you have enough money to cover your monthly expenses. By making $1,000 “the new $0” you have wiggle room that allows you to check in without obsessing.
- By having a sinking fund it allows you to work aggressively toward your other financial goals such as debt payoff or investing. It ensures you have the wiggle room you need to prevent from pulling directly back out of your investments, or regretting that extra debt payment.
- The flexibility to keep extra money in your cash buffer or cash-flow purchases by making up for it in the next payday.
- Get closer to thinking and worrying less about money.
- The ability to use some of this money for unexpected expenses, or an emergency, as needed without negatively impacting other savings or by creating more debt. Obviously this is limited on the amount of your cash buffer. Some expenses are large and we recognize that this may not help if you have a high-deductible insurance plan or need to a major vehicle repair. This is why, once you feel as though you have gained control of your finances, we recommend bumping up your cash buffer amount to a number that makes you more comfortable for your situation.
Don’t forget, personal finance is personal. I recommend you take the above information and modify it to fit your specific needs and situation. Work toward having a cash buffer in your bank account and go from there. It is so empowering to feel more in control and worry less about finances. Share your specific cash buffer strategy in the comments below, and let me know what you thought of this post and be sure to subscribe for more free content, checklists and exclusive tips, delivered straight to your inbox.