A cash floor saves stress and provides financial stability when s$%t hits the fan, and you need dollars quickly.
Murphy, the bulldog, is proof of the importance of having a cash floor.
There are two key mistakes I see people make with managing their money and ultimately progressing financially.
Mistake 1 – Not having a system of allocation for income and expenses
Mistake 2 – Not having a cash floor for emergencies
Essentially, money is coming in and going out, and none is sticking to the side to use for emergencies or the future.
The money flow system
Generally speaking, you would have some income flowing through into your household, and ideally, with that income, you would have a system of allocation that would send some away for future use.
So you can invest in shares, pay down debt, or use it for a future fun goal. It might be a holiday or other fun experiences.
And then you want to be able to allocate some dollars to today for expenses and lifestyle.
Expenses include your bills, groceries, Netflix and other daily, weekly and monthly costs.
And lifestyle can be whatever you want it to be. It’s about filling up the Happiness Bank account, not just your financial bank account.
This is called the system of allocation or what we refer to as the ‘money flow system’.
Unfortunately, when I first meet with clients, this system for allocating income is missing.
And this means they generally don’t have money set aside for emergencies.
The cash floor
The cash floor is the pot of money you set aside that you don’t touch until something unexpected happens and you need cash quickly.
It’s your emergency piggy bank.
We generally recommend you have a cash floor of $2,000, and as you refine your money flow system, you can build that cash floor up.
You slowly raise your cash floor as you can afford to.
When the fridge carks it, and you need a new one, you dip into your cash floor without feeling worried or guilty.
Then you’ll tighten your belt to bring it back up to your comfort level and rinse and repeat that process.
And that’s your financial thermostat.
The goal is to raise the cash floor for the unforeseen stuff that pops up.
Murphy and our cash floor
Having a tidy cash floor paid me back in dividends recently.
While Britt, Norah and I were soaking up the sunshine on holiday in Queensland recently, our beloved family member Murphy the Bulldog suffered an elbow injury.
He required a three-night stay in the hospital, lots of CT scans, anesthetic X-rays, and a course of drugs.
We were lucky enough to have a friend house-sit who got him to the vet for us.
And whilst it was distressing to know our family member was unwell, we could press on with our holiday as planned.
We knew Murphy had the best treatment and care he would need while we were away.
We were in the kitty for seven thousand dollars for the vet expenses.
Thankfully, we had enough money set aside in our cash floor for these types of unexpected situations.
We didn’t need to go and use credit card debts or take the money from our home loan to get Murphy the best care.
Sort out your cash floor
I often encourage people to get used to having a cash floor of $2,000, $5,000, and then $10,000, ultimately aiming for $20,000 over time.
A good rule of thumb is to set aside three months of your expenses.
You treat your cash floor like zero.
You don’t use it for everyday expenses or tap into it for a boozy night out with your mates.
So if something happens, and let’s face it, something unexpected will happen at some stage, you don’t have to eat into your future savings or fun money to fund the emergency.
Cheering you on!
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Important
This is general advice only. Your personal objectives, needs or financial situation have not been considered when preparing this information.
You should consider the appropriateness of any general advice we have given you and, if necessary, seek advice before acting on it.