Monday, September 2, 2013

The Money Cushion

The Cash Cushion

I would like to have a cushion of 3 months. While I've seen statistics that say the average period of unemployment is nine months, I have never been unemployed that long and neither has my husband. Three months seems about right, especially since my husband can collect unemployment if he loses his current job. His previous job treated him as in independent contractor and so when he was laid off, he was not eligible for unemployment. I am an independent contractor myself and not eligible for unemployment, but my income is also extremely variable and unreliable and very very small, especially compared to my expenses. I'm not going to bother including it in my calculations, because I don't include it in my budget. And the chances of us both becoming unemployed at the same time is pretty slim.

Long term goal - 3 months income in savings
1 year goal - 1 month income in savings
Monthly savings goal, about 8.5% of income

Of course this safety net of cash does not just prepare us for a loss of income. It can be used for many emergencies.

  • If we have to evacuate due to fire or another emergency, it can pay for a hotel and food.
  • If our belongings are destroyed by fire, it can pay for replacements while we wait for the insurance company to do what it does.
  • If something breaks and needs to be repaired immediately, we will be able to address it immediately without relying on credit or imposing on our friends.

If there's a black out, we might not be able to get our money from the bank. ATMs might not function, credit card machines might not work. We're going to need to store actual cash somewhere. Not all of our savings, but at least enough to fill up a tank of gas, buy some groceries and maybe pay for a night in a hotel. I don't like the idea of keeping large quantities of money in the house.

Can we actually afford to put aside 8.5% of every paycheck? As it stands right now, we spend each paycheck as soon as we get it. We are going to have to be diligent and budget. It does seem that we always manage to find a little extra money for the extras. We're just going to have to make this an extra.

The Credit Cushion

Paying off or paying down our credit card will give us an additional cushion in case of emergencies. Paying it off will eliminate a bill, making it easier for us to save money and meet our other obligations. Also, it will improve our credit so if we do have to take out a loan in the future, say for a nice big car with room for the whole family and MrRabbit's musical equipment all at the same time, we won't have a problem.

In order to pay off the credit card in a year, I will have to pay about 10% per month. That is not going to happen. I simply can't afford it if I want to save. So I will pay about 5%, which is about twice the current minimum payment, I think I can handle that. That will have the card paid off in two years. I'll take it. In the meantime, if I use the card to buy something online, I will increase the next check I send by double the cost of the order.

Emergency Prep for:
Unemployment, emergency repairs to home or automobile, other emergency expenses, evacuation

Next Month: The Stuff Cushion