The best 5 reasons to have a financial cushion
Posted on January 25, 2022
As you may have probably already know from my other articles, I am a security oriented guy. In my childhood, my family taught me the importance of savings as financial cushion and of a parsimonious life. As children sometimes do, I internalized these lessons and exaggerated the concept, spending (very little) money only for strictly necessary items or services, and often negating myself any kind of “costly” pleasure. I started investing money actively only in 2019, as until then I saw investing only as a way to quickly lose money.
Although it not always easy to cope with such a consolidated behavior, a pleasant side effect is that all the money I did not spend was accumulating on my bank account. Decades of savings paid off, at least financially, as I could suddenly dispose of a considerable amount.
This finding was quite a surprise, because several friends of mine were always struggling to find a balance between income and expenses – I lend some of them money up to 8.000 Euro at once – and since then I was just content that my financial situation was stable.
Observing the relationship my friends and other people I knew had with money, I can identify one big difference leading to the (financial) antithesis I was part of – and that you probably have already figured out. In the article “Keep track of your expenses“ I point out how important it is to know the balance between your income and your expenses, and how you use the knowledge you get from knowing how you spend your money to fine tune your expenses.
But what can you do with the money you save month after month?
Every month, I invest ca. 40% of my netto income in different fonds and ETFs, using the Broker App Scalable Capital (click here for more info*), as all saving plans are fee-free there.
Additionally, I put aside 10% of my netto income as a financial cushion.
Why do I need a financial cushion?
A financial cushion can be good for the mind, as I think it is never wrong to have a certain amount of money to help me in case I have any emergency or even for everyday things, as I don’t want to borrow money from someone or take a credit from a bank. That’s why I’m going to list what I think are the 5 most important reasons why I have a financial cushion – and why you should have too.
1. Financial independence
A certain amount of money means independence, for example from my job or my family. This means that having money in my savings account to keep my life running for the next six months, I don’t need to worry about a new economic crisis or another Covid pandemic lockdown. In other words, I have a safety net that catches me in difficult situations, so I can avoid major financial/existential fears.
2. focus on important topics
Maybe you have already experienced or know from acquaintances: The month hasn’t come to an end, but the money seems to being vanished and you have to scrape together all the leftovers to pay the bills left. Every penny has to be turned over twice before it can really be spent. Money is then drawing all your attention and you cannot focus on anything else. With a financial cushion, such emergency situations can be approached without fearing for your existence until your financial situation improves.
3. Increased psychological well-being
The financial security gained by having a financial cushion takes a big burden off my shoulders. The certainty of having enough money in the short term for the next few months strengthens my general sense of well-being and I am more relaxed.
4. one-off “unexpected” costs are covered
Sudden car repairs or any other major purchases, commonly known as “unexpected” costs, can be easily paid for with the help of your financial cushion. It is important to replenish the financial cushion after such an expense, so that you will be prepared as well for the next unexpected situation.
In the US, a often quoted survey of GOBankingRates shows that almost 70% of the respondents did not have more than 1,000 USD as a financial cushion in their savings account.
5. discipline in money management
A financial cushion strengthens discipline in dealing with money, as the discipline is not to touch this money and to use it only for emergencies. Many people find it difficult not to spend money when they have it just lying around in a bank account. Once you have learned how to build up a financial cushion, wealth accumulation is only half as difficult, as it follows the same principles.
How can I build a financial cushion?
Once that you have found your personal motivation to have a financial cushion, you will need to find out the causes keeping you from increasing the amount on your savings account.
For example, start to make saving money a priority. You shouldn’t wait until the end of the month to see how much money you have left to save. Instead, create a budget and put saving money at the top of your list of most important expenses. To determine how much you can set aside, add up the expenses you need to pay and determine which non-essential expenses you can cut to make more room in your budget to save. In case you don’t know where to start, I suggest you read the article about tracking your expenses.
Automate savings. To make sure you are saving money, ask your workplace HR department to deposit a portion of each paycheck directly into a savings account, or create a standing order to transfer the money amount from your main bank account into a savings account . This approach can work for even the worst savers.
You can then also find someone to hold you accountable. Being accountable for your goals is not something everyone can do for themselves. Scientific studies show that you are more likely to succeed if you get positive support and encouragement from other people. Share your savings goals with a friend or family member, or request the help of a professional, like a wealth adviser, your coach etc.
Final thoughts
A strong motivation is essential to start building a financial cushion, as with it in mind, you will always have a good reason to keep going.
What are your suggestions for having a financial cushion and maintaining a savings account?
The 5 most effective money saving tips I have used!
Posted on October 21, 2021
In this post, I want to tell you the best 4 money saving tips that have helped me a lot and improved long-term my financial situation. Some of them are very concrete, others can be adapted to your own requirements.
I grew up in a very parsimonious family: I can still remember we didn’t have a TV when I was a small child, and it was an iconic event when my parents came home with it one day. We still kept it for more than 20 years (thank you Grundig for such quality!) despite it was a tiny and old box with bad sound.
And then came the time when my mother took me to the bank for the first time – I was still a child – and we opened a savings book account for me, where I could deposit huge amounts (of Italian lire, so not really worth anything but still impressive when one comic book cost 3.500 of them). Being instigated by stories of Uncle Scrooge, I loved to stare at the savings book and to imagine what to do with all that money.
Now savings books are outmoded and the younger generation cannot even imagine how it was when every country in the EU had a different currency, but my basic attitude is still the same as 30 years ago.
5 helpful money saving tips
1. a concrete goal
I can tell you that to lower my sights on expenses is not always as easy as I wish it was. So what keeps me going?
For any negative action, like not spending money for Amazon Prime Video, I need a positive goal I want to reach. Saving – or building up assets – still isn’t enough for me; I have to visualize a specific goal in order to deprive myself from spending money.
Whether it’s for paying off the mortgage for your own property, a sailing boat trip around the world, or being able to pay yourself an unconditional basic income without the necessity to work after your 40s. Everyone has something that motivates them personally to save and invest. So if you’re at the start of saving money, you should be aware of what motivates you – this will help you stay on the right course for the years to come.
2. Cancel Unnecessary subscriptions
One of the biggest costs I always underestimated were monthly subscriptions, which can quickly add up to a considerable amount. Many of them were often not even necessary or the same service is cheaper elsewhere. Subscription are particularly “perfidious” when you pay in advance for a long time period, giving up to the promise that you will save lots of money by choosing a yearly subscription.
Subscription are not only limited to the digital world: public transportation, fitness center, magazines or newspapers are money-hungry services that engulf part of your earnings on a regular basis. Some of them are probably necessary for you, but you can check if you need all of them.
As since over one and a half years ago the obligation of working from the office ceased to apply, I cancelled the subscription to public transportation. When I have to go to the office, I can still ride my bike to reach it, or in exceptional situations – like very bad weather -, I can take the train and in the end I am still saving money.
One good advice is to send the cancellation already when you have just subscribed the service, at least I don't have to keep all notice periods in mind and sometimes the vendors come back to me with good offers if I withdraw the cancellation. What also helped me is to make a list of all my subscriptions, analog and digital, and sort out what I really needed. The others I don't need I terminate.
3. taking food from home
One of my biggest monthly variable costs is food, but the variance is given by how often I have lunch at work or order the food at takeaway’s. Depending on where I am, this can be more or less expensive. During my academic studies, in Italy as well as in Germany for a total of almost ten years, I have usually taken my lunch from home.
Nowadays, with a good basic income, I like to order food for dinner at least once a week. I am aware that doing so, I spend up to 100 Euro (25 Euro a week) every month when I could cook at home and so spend only 20 Euro in total, one fifth of the expenses. This is a tiny luxury I allow myself, fully aware that the amount adds up to over 1.000 Euro a year.
4. invite friends over
If you do a lot of things with your friends, this money saving tip will help you.
Often when I went out with friends, it was in combination with going to a bar or some other cost trap like Oktoberfest, Go-Kart or other expensive recreative activity. Now I prefer to invite friends to my place more often and they do the same, as they also enjoy just being together without the need of distracting ourselves with other activities. You can also cook for – or with – your friends and enjoy a good meal.
Additionally, you are not bound to opening hours and can also have an all-nighter.
5. minimalism
I am not an extreme minimalist in the sense that I only want x things in my life and nothing more. For me, minimalism is about a mindful consumption. I do not need a new smartphone or laptop every year. Minimalism also helps me to get rid of things and sell them on Ebay-Kleinanzeigen, Vinted or other platforms.
I believe that everyone has things in their home they no longer need. If you add up the sale value of all these things, most households could end up with several thousand euros instead of having the garage, cellar or attic full of stuff they don’t need anymore. You kill two birds with one stone, you get pocket money and you have more space at home.
And you?
Are you already implementing one of the tips or a similar one?