There is a lot of uncertainty in the job market today. Businesses aren’t hiring, people are getting laid off and there’s a general sentiment of fear that is going around. There is only so much we can do as individuals to stay employed or keep our business afloat in these trying times.
So today I’d like to write a little bit more about something which I have covered in previous webinars. Let’s talk about preparing for the unfortunate event that you become unemployed or lose your income.
Let’s talk about building up a cash buffer for the down times.
So many people have written about the importance of keeping a cash buffer, but not enough about how you can get started on building one. So bearing that in mind, let’s talk through some easy steps in building up that cash buffer! The best time to start building a cash buffer is NOW!
Step 1: What is YOUR baseline?
Let’s start with the baseline. The baseline is your bare minimum that you need to live comfortably every month. Your baseline will always be made up of the Big 4 Expenses:
- Rent/Mortgage/Rates
- Groceries/Food
- Motor vehicle expenses (fuel, road tax, registration fees, surcharges, repairs, insurance etc.)
- Utility bills (water, electricity, gas, etc.)
If you have children and both parents are working, you might have a 5th large expense – which is Childcare. If this is the case, you should include it in your baseline.
Work out how much, on average you spend on each of those items EACH MONTH.
For example:
Jono spends $2,000 a month on rent, $300 on groceries, $300 to run his car and $150 on power and water bills. This means that his baseline for every month is:
2,000+300+300+150 = 2,750
$2,750 a month is the bare minimum that Jono needs to be spending to maintain his current lifestyle. This bare minimum amount is known as the BASELINE.
Step 2: Give yourself some wiggle room!
Take the baseline you have calculated in step 1 and bump it up by 20%. This 20% is to allow for other expenses – such as luxury purchases or insurance premiums.
This prevents you from living like an absolute miser (and feeling miserable in the process) but sets you a more realistic target of what you need to continue living life comfortably.
Taking Jono’s example:
Jono’s baseline is $2,750, so if we bump that up by 20% – he has about $3,300 for a spending target.
Baseline + Wiggle Room = Your monthly spending target. Never spend more than this because you need to…
Step 3: Save the excess!
I know it sounds simple – but believe me when I say that many people struggle with this. But if you have done steps 1 and 2, it should be really easy for you to recognise that anything above the monthly spending target should be put into savings.
Let’s look back at good ‘ol Jono:
Jono has a take-home pay of $5,200 a month. His monthly spending target is $3,300. This leaves him with $1,900 he can put aside every month.
Now that he knows how much he can put into savings every month, he can start building his cash buffer!
Step 4: Build that cash buffer!
Now, ideally, you will want to have 3 to 6 months’ worth of cash buffer. That means in Jono’s case he will ideally want $3,300 times 3 months = $9,900 worth of cash buffer in his bank account.
Why 3 to 6 months? Because we’re hoping that within 3 to 6 months, if you lose your job, you can get re-hired within that time frame. It’s hard to predict the future, so this is the best estimate that we can use – actual time frame may vary depending on what industry you work in and what region you live in.
If Jono’s using only his savings to build his cash buffer, then it will take him close to 5 and a half months to do this.
5 months may be too long and so Jono needs to get creative.
He knows what his cash buffer target is and he needs to work hard towards building it up.
Some ideas for raising extra cash can include:
- Selling off unused second-hand stuff
- Taking an extra job to make some extra money
- Starting a side-hustle to bring in some cash
Whatever it is – you gotta keep it legal! In other words – don’t sell your kidney on the black market to build your cash buffer!!
Alternatively, Jono can begin to analyse his baseline and his monthly spending and figure out how to get the same services/goods for cheaper – thus reducing his expenses and allowing him to put more money into his cash buffer.
Note that if you are a family unit – your baseline will need to include the family spending on the Big 4 expenses and you will have to take into account the earnings of your partner as well as yours (if you are a dual income family).
Building a cash buffer is often the most challenging step in building financial security. But once you have it, believe me when I say that a huge burden is lifted off your shoulders. Instead of worrying about whether you will have enough money to support yourself and your family, you can focus on creating more income and job hunting.
Wow – saving up a cash buffer sounds pretty intense! What if I can’t put away that much money every month?
I’m glad you asked!
If putting aside $1,000 odd dollars away every month sounds daunting – try this:
At the end of this week, set up a savings account for your cash buffer and put $100 into it.
At the end of next week, do the same thing and put another $100 into it.
The week after that, challenge yourself to put $200 into it. Make small adjustments to your buying habits to achieve this goal.
As the weeks go buy, continue making small adjustments to your buying habits to slowly increase the savings goal to $300 a week, $400 a week and eventually $500.
If you find that you can afford to put away more than $500 a week in your cash buffer – go ahead and do that until you have hit your cash buffer savings goal!
Small incremental changes lead to small wins which keep you motivated and disciplined to stay on the track to financial security!
But what If I have already lost my job and I DON’T have a cash buffer?
Oh no!
Ok, first off – don’t fret. Let’s focus on the positives first:
Being out of work can also mean that you are potentially saving costs on transportation, work clothes, lunch breaks and most significantly, childcare (if you have small children). So all of a sudden your living expenses have decreased some what.
Being out of work also gives you an opportunity to pursue some side-hustles and maybe even start your own business! But we’ll cover that topic some other day.
If you don’t have a cash buffer – you still need to think about your baseline and how to reduce it. Ultimately I believe that necessity is the mother of invention and that you will come up with creative ways to reduce your expenses and increase your income to get through this. Be strong!
Tough times are ahead, but I believe that we are well-equipped to face down any uncertainties in the future.
Stay smart team! And most importantly,
Stay positive!