What a financial airbag should be
Many have already heard about what a financial safety cushion is, and some have already saved up for one. We, at our financial school, are confronted in practice with questions from our students about what it should be.
In personal finance, there are still debates about what a safety cushion consists of (unit of measure – in income or expenses) and how many parts it should have (1, 3, 6, or 12 months).
But first, let’s talk about what a financial safety cushion is.
Many people say you need one and few people fully understand why.
A financial safety cushion is your savings that will “finance” your life for a period of time, even if you don’t have your usual level of income during that period.
The airbag is needed not only to support you in case you lose your job or God forbid a long sick leave, but also in case you decide to get an education or change the field of activity, taking a short break between your previous job and a new one.
A financial safety cushion will also keep you safe from major unexpected expenses, such as having to move or repairing damage. But that’s not all.
It’s what will bring you peace of mind and allow you to choose the job you want, the rhythm of life you want. No airbag – the choice narrows. After all, the topic of money is one of the main ones, since even food in our world is purchased with money.
A financial airbag, while not a financial freedom fund (which we’ll talk about in other articles), can help you get through any financial difficulties with your head held high, but not only difficulties. One of our co-founders, at one time, thanks to the accumulated safety cushion, managed to get a new higher education and change his profession, while not working for a significant amount of time.
Either way, a financial safety cushion will help you get through any period of your financial life easily without getting bent out of shape, which is the most important thing in any financial situation.
Why does everyone talk so much about a financial airbag. Because it’s the foundation of your financial well-being. There’s no point in saving money to invest in some financial instruments if you don’t have a base in the form of a financial safety cushion. After all, if anything, you will have to withdraw this money urgently from brokerage or other accounts, and it can be unprofitable for you.
Everything is clear with the need for a financial cushion, it’s like knowing how to count, you can’t do without it. Now let’s figure out what a financial cushion should be.
How to save, in income or expenses
There is some debate about what a financial cushion should be. Some say it should be measured in your monthly income, while others say it should be measured in expenses. Most of our prospective students, according to our surveys, spend as much as they earn, so it doesn’t matter at the start whether you’re saving income or expenses.
The idea is to set aside your expenses, including credit or credit card payments, if you have any. Because your financial cushion should cover your regular expenses while you change jobs or look for a new source of income.
The same applies to aspiring entrepreneurs. They, too, need a financial safety cushion, despite the fact that at the start-up stage, entrepreneurs’ income is irregular and jumpy. It would be better, of course, to save in your monthly income, but expenses are fine for you as well.
What should be the size of the financial cushion in months.
It is believed that ideally there should be a year of your expenses in order to make your financial safety cushion truly secure. But we are also close to the theory that 3 to 6 monthly expenditures in your account will provide you with peace of mind for a long time. 3 or 6 is up to you – it all depends on your specific situation, your current profession, place of employment, current income level and area of expertise.
Our view is this – you should go gradually, first you will have 1 month of expenses in your account, then 2,3 and 6. Once you have provided yourself with a financial safety cushion, you can start thinking about investing.
How it helps in investing
In investing, such a concept as “money management” plays an essential role. Don’t rush into investing if you haven’t mastered “money management” on your personal or family finances. The art of money management begins with your habits of saving and saving money.
These habits will come in handy in investing, because investing itself is not just the art of finding the right financial instrument, it is the art of managing your money. It’s about choosing how much money you invest in high-risk assets and how much you keep in your portfolio in low-risk assets. It’s about choosing the right instrument to hedge risks and much more.