Forget emergency funds, forget investing, forget property.
Before we build up to these, we need to strengthen our financial system.
This means making sure we can keep our head above water at all times.
The best most simplest way to stay afloat is to keep a float.
I've mentioned before how I like running my finances like a business and this is one aspect of that.
So what is a cash float?
For personal finance, a float is an amount of money that you consistently keep in your primary bank account.
Not your savings account, not your spending account but the place where your income goes in and out (which shouldn't be a spending or saving account).
This float is your baseline, something you should consider as a bare minimum for your financial setup.
Those who are stuck like pay to pay will see the most enjoy this but I think its a must have for every one.
A float gives you peace of mind in case expenses popup or change at any given time.
It's a self built safety net so that you have some flex with money.
A small way to help potentially reduce a large amount of stress.
How does this work then?
Think of it the way businesses use a float in a cash till.
Tills aren't empty, waiting for customers to fill it up with cash.
There is money in there at the start of the day should customers need change. I send any extra money sitting in the till at close of business to the bank and the same original amount is ready for the next day.
I make it a rule to have 1.5 pay cycles in my account as a bare minimum.
For example if you get paid every 2 weeks, and that your pay is $1000, I would suggest having $1500 in your primary account at all times. This is irrespective of where you are at with the pay cycle.
My rule is not go below that 1.5 times threshold. I don't count down to $0, so I would count down to $1500.
Isn't this an emergency fund?
No this isn't an emergency fund.
I suggest an emergency fund to sit completely separately from your primary operating account.
It's also meant to be there for emergencies only, thus why its suggested to cover living expenses for 6-12 months.
A float is a backup or buffer for your main primary account in case costs are not as you expected.
You shouldn't need to be in strife or stress if you get a bill that's $30 more than you thought.
The buffer is there to cover costs when needed. Not when you want to order Uber Eats because you can't be bothered cooking.
The times when things happen like that bill you forgot was arriving, a car needs an extra service, or something so irregular you couldn't plan.
You shouldn't need to be in a position where a higher than planned bill is suddenly an emergency. You should have some immediate backup available so that things can continue as you'd like.
If you leave the exact amount in your main account to cover costs, any little change to that flow might put you behind where you have the potential to fall further back.
How to build and manage
Firstly, work out what 1.5 times your pay cycle is. Doesn't matter if its weekly, fortnightly, monthly.
Work to build up this amount in your primary account. It's going to be hard not to spend it. Try not to think of it as savings as well. It's not there to be spent, but to keep your finance system running smoothly.
You don't need to continue to contribute to it, but should you dip lower than your 1.5 amount you'll need to top it back up. This might mean spending less or pulling some from savings.
For me, it took a bit of management but after a while it was something I become familiar with.
My bottom wasn't zero it was 1.5.
I needed to maintain this first and foremost. Before I built up and emergency fund, bought shares, property etc. I had to make sure I had enough to manage my lifestyle without the fear of flat lining my finances.
Now you might be thinking “oh im just going to spend it” or its impossible to save that much up. If you are reading this far down and want to make real change then I suggest thinking about how you manage your ingoings and outgoings.
Setting up a buffer doesn't need to be done overnight. If your 1.5 is $1000 then slowly try to add $50 or $100 each cycle to your buffer and build from there. 1.5 is my suggestion.
You should be optimising our banking so your primary account is a savings only account, cannot do transactions and that your spending accounts are with another bank that you transfer to on a similar cycle.
Give yourself some breathing room with a personal cash float
If you have less than 1.5 a pay cycle in your main account then its time to focus on building this. I've held an ongoing balance like this for years and it keeps me out of harms way knowing there is that bit of extra cash available just in case.
Avoid getting addicted to the pay cycle and desperate for that injection of cash it gives you.
A buffer will give you the ability to forget about pay days and reduce that stress a bit.