Cash Cushion

What do you do if the rain floods through your roof?

For some things, only cash will do

Maybe your insurance company will behave as in the ads. But sometimes they don't.

Maybe your emergency medical treatment will be covered by the NHS. Well it will be, eventually.

Maybe your children will never get into trouble.

Whatever, every family should have a cash cushion for emergencies.

What do you mean by cash?

Any money you can access quickly and reliably.

How quick and how reliable? That's for you to decide. Some like to take a few chances with speed or reliability to earn a bit of extra interest. Some don't. It's a personal thing - like so much in family finances.

How much cushion?

The standard recommendation used to be 'at least three months' outgoings'. In these more volatile times six months would be a recommended minimum. But.....

The right answer is 'whatever you feel comfortable with'. Like so much in personal finance there is no general right answer but there is a right answer for you. How stable is your income? How secure is your job? How flexible are your living standards? Do you have dependents and what are their expectations? Are you a risk-taker? What does your partner feel?

Why not just borrow when you need it?

Actually this is a good question:

• So long as you don't have expensive debt and a cash cushion. Much better to use one to pay off the other. Then, maybe have a credit line - a bank facility that allows you to borrow if you have to. As always, the decision depends on costs and you life plans.
• But make sure your access to debt is secure. Sometimes credit can just dry up - as Northern Rock discovered.
• ...and none of this is a substitute for being debt free and having a cash cushion.