Back at the beginning of 2020, no one thought that we’re facing the biggest economic crisis the modern world has ever seen. The Covid-19 pandemic took over the entire world. Millions of people lost their jobs, and thousands of businesses collapsed.
Governments came out with plans to protect their citizens and SMEs, but it seems like everyone’s struggling with the changes. Now, in the middle of 2021, the crisis seems like it’s slowly going away. The economy is facing recovery, and jobless people are about to get back to work.
With everything in mind, it seems like we’re going into a brighter future. The only problem is that even though we see the light at the end of the tunnel, no one seems to know how far it is.
The pandemic depleted almost everyone’s budget
Even those who are the most cautious with their money had a problem maintaining steady cash flow. Only people who worked in industries that stayed intact from the pandemic didn’t have a problem. Everyone else saw a drop in their income.
Some people reached zero on their balance. Checking accounts facing going into overdraft need to be protected. The overdraft fees are enormous, and getting back from overdraft means spending tons of money on interest rates.
Using a financial cushion can prevent this
In the financial world, there’s the term financial cushion. Also known as a cash cushion, but not to be confused with an emergency fund, it is a way to prevent you from going into an overdraft.
It works by cushioning your need to withdraw money from your checking account but remain your balance over zero. That prevents from going into an overdraft.
Times like these, when you must pay your bills, but have insufficient funds, require doing something that will keep you from going into debt. Using your financial cushion is often the only thing to do to mitigate this problem.
There’s no fixed amount that people use as their financial cushions. It depends on how much they are spending and what their lifestyle is. If the family has a joint income of £12,000 per month, it’s normal to have a cushion of even several thousand. On the other hand, living alone and making £3,000 per month means that a couple of hundreds is just enough.
Is it smart to use it in the pandemic?
The best thing you can do for your budget during the pandemic is to change your spending habits. Understanding that this is not an ordinary situation is crucial. No one can predict how long it is going to last and if it’s going to end.
Meaning, you should reconsider your spending and adjust to your new income. If you see that your account is getting lower and lower by the day, it means that no financial cushion will soften the blow.
On the other hand, if you’re struggling to pay your debts and there’s no other solution, then it’s smarter to use the cushion and pay the rates instead of going into additional debts. At the same time, you need to look for other solutions that will provide more income to get your budget back in shape.
How to set up and how to use a financial cushion?
All banks have different policies on this feature. The best thing to do is go to your bank and ask the employees there. They will explain everything you need to know. There are multiple solutions you can choose from, so better if you ask all the questions you have, to pick the one that serves you best.
You can say that this question has no definite answer that will fit everyone. If your income is steady, then no, you should leave the cushion as it is and change your spending habits.
However, if you’re income is not enough to cover the monthly loan and bill requirements, and you have no place to find the money for it, then yes, it’s smart to use the benefits of your financial cushion. Once you deplete these funds, you’ll have no choice but to go over into an overdraft, so make sure you have other income sources.