3703: Simple Finances: How and Why to Build Up a Cushion in the Bank by Leo Babauta of Zen Habits on Financial Security

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[00:00:54] This is Optimal Finance Daily. Simple finances. How and why to build up a cushion in the bank. By Leo Babauta of zenhabits.net. And I'm your host and narrator Justin Malek reading to you every day with permission from the authors. All to give us both a little push in the right direction. So with that, let's keep pushing as we optimize your life.

[00:01:23] Simple finances. How and why to build up a cushion in the bank. By Leo Babauta of zenhabits.net. Recently, I began to do something in my bank account that would have been unthinkable to me a few years ago. Build a relatively large cushion in my account to allow myself to pay all my bills at the beginning of the month.

[00:01:46] It makes more of a difference than you might think. Building up a cushion in my bank account isn't a complicated concept. Instead of having just about exactly what I need to pay my bills and transfer for savings, and then getting down close to $0 after all the payments are made and transfers completed, I decided to try to have a larger amount in the account even after the bills are paid. Let's take a look at why and then how to do it if you're interested.

[00:02:16] Why build a cushion? Let's take a step back for just a second. To understand one reason why I want to build a cushion, you have to understand where I came from. It was only a couple of years ago that I was living paycheck to paycheck. That's a scary thing for anyone, but especially if you have a family and only one income. I've since improved my finances mainly by living more frugally, paying my debts and learning to save for an emergency fund.

[00:02:45] But the cushion I've been building helps create a sense of even more security. Knowing that in addition to my emergency fund, there's money in the bank in case a bill is automatically deducted without my realizing it. In case I'm out buying something and realize I don't have enough cash. In case there are charges I'm not aware of. Besides security though, there's an equally good reason to build up a cushion in your bank account. It simplifies your finances.

[00:03:14] For example, if your cushion is big enough, you can pay all of your bills at the beginning of the month instead of paying some each paycheck. And in my case, as I do freelance work and get some income from this blog, I get a bunch of checks a month which can make bill paying difficult. There is real value in being able to pay all your bills at once and not have to worry about it for the rest of the month. Paying bills throughout the month can be complicated and stressful.

[00:03:43] Paying them all at once is simpler, easier, and saves time. I'll admit that I could be making more money by taking my money out of my checking account and earning interest or investing it. But I feel that this financial peace of mind and simplicity are both powerful reasons to keep that cushion in my account. How to build a cushion in your account.

[00:04:09] So let's say you are interested in building up a cushion in your bank account and in simplifying your finances by paying all your bills at once instead of throughout the month. How do you do it? Well, there's no one way, so I can't give you a step-by-step guide. But here are my suggestions. One, cut expenses. This might sound obvious, so I won't belabor the point, but if building a cushion in your account seems difficult, you'll probably need to cut out a few expenses to do it.

[00:04:39] And that's good advice for any financial goal, not just this one. Make it a goal to reduce your expenses by $100 or $200 a month or more if you think it's possible. See what expenses you're paying now that aren't absolutely necessary or what can be reduced. Look at the big things like house and car and food. Look at the little things like magazines and music and clothes and coffee and dessert.

[00:05:08] Two, budget. If you're having a hard time financially and you might not want to hear this, you'll need to create some kind of budget or spending plan. This allows you to plan for your expenses and know where you're going to put your money. With a budget, it's easier to see what you can cut, what's necessary, and how to put a little extra aside for the cushion. It's also good because then you know how large your cushion needs to be in order to pay all your bills at once.

[00:05:37] Three, emergency fund. I've talked about how to create an emergency fund, follow those steps, except that for the purposes of this article, you'll want to do one of two things. First, create an emergency fund, then a cushion. Once you've saved up an emergency fund of about $1,000, the minimum you'll need to start with, then redirect those savings to build your cushion in your checking account.

[00:06:04] And second, use your emergency fund as your cushion. Alternatively, use the emergency fund temporarily as a cushion. As long as you don't spend the entire amount when you pay your bills at the beginning of the month, this is an easy way to get to that cushion quickly. Four, little by little. If you can put $200 per month or more aside for your cushion, you can have a nice little cushion in a few months.

[00:06:33] It's important that for the purposes of spending, you pretend that cushion isn't there. I withdraw my spending cash, so I'm not tempted to use my debit card to withdraw the cushion. Setting aside a little at a time will take a little longer to get to your ultimate goal, which is to pay all your bills at once. Five, refund. If, however, you get a windfall, such as a tax refund or a bonus at work, or a large payment from an extra project you did,

[00:07:03] or something along those lines, instead of spending the money, you should leave it in the bank as your cushion. This is the fast method to building a cushion. Although, as it's hard to plan on this happening, you should do the little by little approach in the meantime. Six, pay bills all together. Once you've built your cushion large enough so that it equals your monthly bills, you can now pay all of your bills at once.

[00:07:31] I like the beginning of the month, but your situation might vary, so set a day when you plan to pay all of your bills, go online, make the payments, transfer your savings deposit, and then withdraw your cash if you use the cash method. If you use a debit card for expenses, such as gas, groceries, eating out, and so on, again, you'll need to be careful not to spend your cushion. So pay all your bills on one day, then forget about it. Ah, the simplicity.

[00:08:02] And seven, use last month's income for bills. Once you reach this point, from now on, when you get paid, you don't spend it. You leave it in the bank to pay next month's bills. From this point on, this month's bills will be paid by last month's income, and this month's income will be used for next month's bills. It's a beautiful thing knowing that you've got enough for more than a month's expenses sitting in your bank account.

[00:08:29] Your finances couldn't get much simpler. You just listened to the post titled, Simple Finances, How and Why to Build Up a Cushion in the Bank, by Leo Babauta of zenhabits.net. I'll be right back with my commentary. You've heard me talk about how I started tracking every dollar in and out of my life back in 2010. It began as a business school assignment, and I liked it so much, I never stopped.

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[00:09:25] My favorite part is just asking the AI assistant, can I afford this vacation without touching my savings? And getting a real answer. Write your own money story with Monarch. Use code OPTIMAL at Monarch.com to get your first year of Monarch Core half off at just $50. That's 50% off your first year at Monarch.com with code OPTIMAL. When you need to build up your team to handle the growing chaos at work,

[00:09:54] use Indeed Sponsored Jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications, and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a $75 sponsored job credit at Indeed.com slash podcast. That's Indeed.com slash podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed Sponsored Jobs. Thank you to Leo.

[00:10:22] This is one of those money ideas that a strict optimizer would probably hate. And that's exactly why I like it. Because if you run the numbers, keeping a big pile of cash just sitting in your checking account is technically a waste. That money could be invested earning something. Leo even admits that himself. But he keeps it there anyway on purpose because the peace of mind is worth more to him than the few extra dollars. And I get that.

[00:10:51] There's this idea in personal finance that every dollar has to be working and optimized. But peace of mind is also worth a lot. The feeling of not living right at the edge of zero, of knowing your bills are already covered, that's important. And I've felt the difference myself between having a buffer and running things tight, and the buffer version of me is just calmer. I make better decisions.

[00:11:19] So if you've been pouring every spare dollar into investments, and you still feel financially anxious, maybe the best move isn't another investment. Maybe it's just a little cushion of cash that lets you breathe. So thank you to Leo for this one. And thank you. I appreciate you being here and listening every day. Have a great rest of your day, and I'll see you tomorrow, where your optimal life awaits.