Finance Tip: “The Cash Flow Buffer”

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.

Inflation is falling, but its still very high

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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Finance advice: How to make a crisis into a nuisance

From time to time we do finance pieces on this blog. The finance industry has used fear and complexity to increase its income generation. Simply put, personal finance has been made more complex to ensure finance professionals can make money. Is managing money easy? No, however it’s not very hard either. You do not need an economics degree or financial advisor to ensure you have good financials outcomes.

One thing we all deal with is unexpected money issues. Your car breaks down, your pet needs an operation, your child need dental work, on and on. If you are not prepared for these they can become crises, and if you have anxiety it can be crippling. For those of us with anxiety managing our finances is tough enough, unplanned events? That’s a killer. In my post here I give you the single most important thing you can do to convert a crisis into a nuisance.

Wild Fire
Prepare for Crisis, you never know when it will happen.

Yes, it’s called an emergency fund. I know it sounds too simple doesn’t it? No financial advisor needed, no complex matrix of asset ratios, how many bonds to equities on and on. You need 3-6 months of your normal monthly expenses available to you in cash within 1-3 days. It can be under your mattress, in a safe, in a money market account, where ever you feel most comfortable.

I know I have covered this before but it’s such an important concept it bears repeating. You have to be disciplined and not use this money unless it is an emergency. If you can do this and stick with it, even if its $1,000 you can avert a crisis. Most of us are not wealthy, many of us have a lot of debt. Whatever your personal situation is, your number 1 financial goal as a person with Anxiety should be to have an emergency fund.

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