This particular tip is used in business often. It is exactly as it sounds a buffer. Keep in mind that opinions I express in my blog may or may not be good advice for you personally. You should investigate all financial advice thoroughly before pursuing any course of action. So a cash flow buffer is a concept that many people might confuse with an emergency fund in the context of personal finance.
With the job market shifting to a more hustle economy, you might not be earning a steady paycheck any more. You might be doing contract or consulting work and who knows you might kill it for 8 months, then the next 2 months your down 60% on your earnings. This isn’t as farfetched as you might think. This happens a lot now. What I am seeing in the news articles I read are people busting their tails for 6 months, doing uber eats, working a full time gig, then maybe one more side hustle and banking a large chunk of change. Only to then slow WAY down to recover for 3-4 months, rinse and repeat.
The job market in the U.S. has changed a lot in the 35 years since I started at burger king in the mid 80’s. So one of the approaches I take with family members I advise financially is treat the working part of your life as a business. We set up a balance sheet, expenses etc. We build an emergency fund of 6 months of expenses (if there isn’t a whole lot of debt) and then work on the Cash Flow Buffer. There it is again, lets define it. A Cash Flow Buffer is the number of days you could continue to pay your bills out of your regular bill paying account if income were to stop.
Again this isn’t an emergency fund! So you have 5K in your checking account, you lose all your jobs you have no money coming in. You spend 3500 a month for expenses this would mean you have a cash flow buffer of 45 days. So many would assume you would then begin to tap your emergency fund, and that would be correct. AT THE END OF THE 45 DAYS. You see the buffer is meant to create space for you so you can replace income.
That 5K will keep you afloat for 45 days that’s your real window until you have a real emergency on your hands. The buffer assumes you are not replacing your income. Businesses use this tool a lot, particularly seasonal businesses who do a large % of their sales at a specific point of the year. For you in the new gig economy this might be useful for you to gauge as you navigate the new normal for working.
So how you do it is, look at your monthly spend. Take out all the non-essentials and come up with a number. (rent, electricity, food, water). If you lost all your income today how long could you pay for things without tapping your emergency fund? You see the concepts here are more for discipline purposes. The last thing we want to do is hit the emergency fund because if we tap into that, we know that things are really bad, it’s for emergencies.
Think about your personal cash flow buffer. I keep about an extra month of bills in my checking account so my buffer is 30 days which is light. I am confident that I would be able to replace my income (or a good chunk of it) before 30 days. Ideally you have a 30-60-day buffer here that you would use BEFORE the emergency fund.
I know it’s confusing, but if you start treating your financial situation as your own personal business and economy you might find that these things make sense.
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