A cash buffer gives you the security of having money on hand if your personal finances take a turn for the worse. A hike in interest rates, job change, car troubles or even health issues can leave you strapped for funds if you don’t have savings to fall back on.
Where to start?
If your money just seems to disappear and you’re not quite sure where it goes, start by keeping a record of how much you spend. Get yourself a notebook and every time you spend money, write it down – keep this up for at least a month or even longer until a clear pattern emerges.
Look through your spending record and decide what you’re willing to cut-back or whether there is a cheaper alternative. Don’t just focus on the big ticket items; sacrificing a small expense like a takeaway coffee or sandwich per week could save you up to $2,000 a year. Remember, every dollar you put away brings you a step closer to feeling more financially secure.
Where to put it?
If you have a loan with a redraw facility, putting extra money on your home loan is an effective buffer as you reduce the size of your loan now (and the interest charged over the length of the loan) but you can still redraw the excess payments if you need the cash.
A similar option is an offset, which works like a savings account connected to your home loan, where you deposit money into it and use it to pay off your bills and daily expenses. With either option, adding the extra cash to your home loan allows, where possible, you to earn interest tax-free – as your savings reduce the interest payable on your loan.
If you want to build up cash savings, the simplest option is a high-yield savings account or term deposit. Locking your money away in a term-deposit will earn a higher interest rate than is offered with most saving accounts.
With as little as $1,000 in your pocket you could get involved in a managed fund – allowing you to access certain investments at a fraction of the usual cost. While investing in a range of shares often involves large sums of money, managed funds allow you to share these costs with other members of the fund rather than having to pay the minimum investment fee on your own.