In order to make your budget work and stop living paycheck to paycheck, you need to have a cushion in your account so that you can cash flow your budget. You know this, but maybe you cannot figure out how much this cushion should be. Once you have this cushion, you will feel like you won with money.
I tell people that on average, the cushion in their account should be half of their monthly expenses. This is the average. If you receive all your income on the first day of the month, you don’t need a cushion. You have all the money you will need for the month on the first day if you follow a zero-based budget.
If you receive all your income on the last day of the month, you need a full month of expenses for your cushion. Since most people get paid in-between these extremes, you need something in between.
Determine Your Cushion Amount
To determine your cushion amount, list all your expenses and your income by the due date or when you get paid. Like a check register. List a running total of everything as if you already lived the next month based on your budget. The cushion you need before you start the month is the greatest negative amount you have. See the example below.
I wouldn’t want to run my account to zero dollars, so I would have a cushion of more than $830 to start the month in this example. Maybe $1100 or $1200. You just need to have enough money to cash flow the month. At the end of the month, because of your zero-based budget, you would end the month with the same cushion amount in your bank account, ready to go for the next month.
Getting Enough in Your Account to Cash Flow Your Budget
Now that you know how to calculate how much you need in your account before the month begins, you need to put in the effort to get there. Knowing the amount for the cushion is the first step and the easiest step.
The second step is harder because you will need to budget for this money. If your budget is already tight, you will need to give up some things in order to get your cushion saved. If you want to get out of debt and build wealth, you will need to change your behavior with money, anyway, and you need money available in your budget to save and pay off debt.
Making your first budget is part of Baby Step 1—Budget and Save. Part of your first budget is to save enough money so that you can cash flow your monthly budgets indefinitely. It’s a big mindset and behavioral change that needs to occur so that you can save a lot of money fast. In the sample budget above, you need to budget a minimum of $830 into your first budget that will stay in your bank account. The good news is that this amount in the next budget will be used for your $1000 starter emergency fund. This assumes you cannot do both in the first month by saving and selling items. Each month after this, the “$830” can be used to pay off debt.
Get Your Budget Cushion Fast
Don’t take 3-6 months to get this cushioned saved and your $1000 emergency fund saved. You will struggle with this and struggle with your debt. If your house was on fire, you would get yourself and the kids out of there ASAP! Your financial life is on fire if you cannot cash flow your budget and save $1000! Make more income, sell things, and cut expenses. Get this step done fast!
Once you are cash flowing your budget, some of the financial stress goes away. You are not living paycheck to paycheck anymore. This is half the battle when it comes to money. You no longer need to worry about bills getting paid on time. You have the money! It’s an awesome feeling living like this. This is what winning with money looks like.