Cushion is Key

I'm notorious for pitching counter-cultural and seemingly contradictive ideas to my clients. Ideas such as:

• Stopping the use of credit cards makes our finances less risky and more streamlined.

• Creating more savings accounts makes our financial life simpler. 

• Spending more on our wants (with less guilt) creates better control and restraint on our finances. 

Another seemingly contradictive idea came up this week while I was on the phone with a client. We were discussing a separate issue when he said, "Travis, you were right." Whenever someone says, "Travis, you were right," I'm all ears. It always beats "Travis, I told you so."

The idea in question was my insistence that if we do budgeting the right way, we'll never again care what day a paycheck is coming or what day a bill is being paid. For millions of Americans, one of the biggest tension points in their finances is the fear x bill will be paid before y paycheck arrives. Most believe the answer is to make more money. I can testify this is entirely false. It doesn't matter how much money we make if we don't do it well. I've worked with clients making $25,000/month who have this problem, and I've worked with NFL players making 10x this who have this problem. 

If the solution isn't more income, what is? There are two pieces. First, we need a cushion in our checking account. When the month begins, we must have a certain amount in our checking account. Each family is different, but a cushion is key. Some families elect for a $2,000 cushion (where my family traditionally stands), while others aim for $5,000, $8,000, or even $10,000. I've even worked with one client who kept a $250,000 cushion (it's a long story with a fun ending). 

This money isn’t to spend….it’s to hold. This cushion removes most of the fear about the sequence of transactions. If there's an appropriate cushion, it doesn't matter if two large bills come out before that next paycheck. Going from $3,000 to $1,000 is a nothing burger compared to going from $500 to -$1,500. 

However, that's just half of the remedy. Here's the other half. We need to be intentional with our income. For example, if your family has $8,000 of income arriving this month, you need a plan to spend/save/give $8,000. Not more, and not less. Here's how the math works.

Beginning Balance: $3,000

Income: +$8,000

Spend/Save/Give: -$8,000

Ending Balance: $3,000

If done well, you'll end the month with roughly the same amount you started with. Along the way, you'll have funded your needs, wants, giving, saving, and investing with ALL your income. Then, when the next month comes around, you'll get to do it again. If we play this out for 20 years, you'll wake up on the first of the month with the same $3,000 cushion. 

Whoalla! If you follow these two steps, you'll never again think about timing. It's so simple, yet so powerful. Please let me know if you have any questions. I'd love to help!