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A Payroll.org survey cited in a recent Forbes Advisor guide identified that around 75% of Americans depend on their next paycheck to survive, demonstrating how difficult it is for people to save or invest after covering their basic expenses. For many, creating an emergency fund is crucial, but there's another important and often overlooked financial strategy: the cash flow cushion.

Build your cash flow cushion

Consuming paycheck to paycheck is not necessarily related to a lack of income, but rather to a lack of preparation for unforeseen financial events. The cash flow cushion is a reserve of funds in the current account equivalent to one month of expenses, different from the emergency fund, which is for larger unexpected expenses. This reserve guarantees financial and emotional stability on a daily basis, reducing the stress of depending exclusively on your next salary.

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To build your cash flow cushion, start by understanding your monthly expenses, including rent, utilities, food, transportation and health insurance. These essential expenses determine the size of your reserve. Set aside funds to cover them by reallocating savings or adjusting your budget. This practice helps you avoid living paycheck to paycheck, providing financial security.

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Understand how to set up your cash flow cushion (Photo: reproduction/Getty Images Embed)


How to Maintain Cash Flow Cushion

The cash flow cushion offers significant advantages, such as reduced financial stress and security in the face of unexpected challenges. Having an amount set aside to cover extra expenses, such as car repairs or a temporary reduction in income, avoids the use of credit cards or loans, maintaining financial stability.

To maintain your cushion, automate transfers from your savings account to your checking account and monitor your expenses quarterly. Even if unforeseen expenses arise, replenish the cushion as quickly as possible to maintain its effectiveness. Despite potential concerns about missed investment opportunities, the financial security provided by the cushion outweighs the disadvantages, allowing more focus on strategic financial goals.

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