How do you build a financial cushion?

To build a financial cushion, you should make a budget, find ways to cut spending to free up money, and set a goal for how much you want to save. It’s also easier to build a financial cushion if you pay down debt, find ways to increase your income, and automate your savings.

A financial cushion is similar to an emergency fund. It’s money you set aside to pay for unexpected costs, such as car repairs or higher-than-normal bills. However, a financial cushion is meant more for day-to-day costs, while an emergency fund is designed to cover emergencies. Having a financial cushion can limit the negative effects unexpected costs have on your budget and possibly prevent you from needing to borrow to make ends meet. It’s called a cushion since it’s a buffer that can prevent you from getting hit hard financially when an unexpected expense occurs.

How to Build a Financial Cushion

Make a Budget

A budget lays out how you want to allocate your income among your expenses. When you know how much you are spending, it will be easier to figure out how much you will have left every month to contribute to your savings and build a financial cushion. A budget can also help you identify areas where you can cut back on spending to make sure you have money available to save.

Set a Goal

You should have a specific goal for how big to make your financial cushion. Having a specific goal can motivate you to save, help you come up with steps to achieve that goal, and make it easier to track your progress. For example, you could determine you want to have a $5,000 financial cushion and then come up with a plan to save a certain amount of your paycheck each month to reach that goal. WalletHub makes it easy for you to set savings goals and track your progress.  

Reduce Unnecessary Spending

To free up money that you can then contribute to your financial cushion, try to identify expenses that you can either reduce or eliminate entirely. For example, you might decide to dine out at restaurants less often or cancel subscriptions you no longer need. A budget app, like the WalletHub app, can analyze your spending, identify subscriptions and other recurring charges, and recommend things that you can do to save money.

Pay Yourself First

The first thing you want to do every time you get your paycheck is set money aside for your savings. This is called the pay-yourself-first method, and it makes sure you save some money before you have the chance to spend it. If you automate contributions to your savings account after each paycheck comes in, you can build a plush financial cushion without much thought.

Pay Down Debt

A lot of debt, especially high-interest debt, can eat away at your savings and prevent you from contributing to your financial cushion. Paying back your debt can therefore help you maximize how much you’re able to save every month.

One way to do this is to make extra payments to the debt with the highest interest rate (since it’s the one that will cost you the most), while still making the minimum payments on your other debts. Once you have paid off the debt with the highest interest rate, move on to the debt with the next highest rate and continue this process until you’re out of debt.  

Increase Your Income

The more money you have coming in every month, the more you can contribute to your financial cushion. So, consider asking your employer for a raise, working overtime, getting a side hustle, or switching to a job with higher pay to boost your income and savings capacity.

Monitor Your Progress

Make sure you are monitoring your progress as you build your financial cushion so you can stay on schedule and quickly make adjustments when necessary. If you realize you are not making as much progress as you’d hoped, you may want to evaluate your budget and see what expenses you can reduce to increase your savings.

To learn more, check out WalletHub’s emergency fund guide.