The layers of financial protection for unexpected expenses and overestimations in your budget are important.
I’m Nathalia (She/Her/Ella), a self proclaimed Alpha Latina. I am an immigrant to the U.S., a wife, a mother and a chapina dedicated to empowering my community! My passion for financial education was born out of a need to educate myself on my own financial journey.
I got myself out of $18,312.27 of credit card debt by budgeting and learning all things personal finance. I’m a part time money coach, full time 9-5 employee, and bread winner in my family. Currently, I’m working toward retiring both my husband and myself comfortably.
I’m working on finding my inner niña that was left behind in Guatemala, reconnecting with my ancestors, and learning who I am outside the influence of the colonizers. I eagerly talk about the barriers we face in our communities when it comes to financial education and the ability to create generational wealth. My hope is that by sharing my knowledge and experience, we can break down those barriers and empower you to achieve financial freedom in your lives.
I have implemented layers of financial protection into my own budget for when things just don’t go as planned. Here they are!
1. checking account cushion
First you have the checking account cushion. This protects you from potentially over drafting your account when you miscalculate an expense or forget about a payment that was supposed to go through (It happens).
My checking account cushion came in handy when our electricity bill came out higher than I budgeted for. I budget $150 for it as a high end because we had been using our AC a lot. Usually, it comes out to $100 one month it was $163. My checking account cushion took the difference between the $163 and $150.
It might seem small but if you are only leaving money you will use in your checking account and you miscalculate between $50 or more then it can lead you to overdraft your account if you are just starting out budgeting or living paycheck to paycheck. Overdraft fees will cost you more money than keeping a few hundred in your account as buffer. You can keep any amount that makes you feel comfortable.
I am usually ok with $200, some people like $500, some people keep an entire paycheck worth in there. But remember that having too much in your checking account can also cause your money to lose value because of inflation. So don’t keep more than you need.
2. Mini emergency fund
My mini emergency fund helped when I went over budget for our back-to-school budget. I wasn’t aware they charged $40 for iPad insurance, plus not only buying my daughter’s school supplies but also contributing to the community supplies. This was my daughters first year in school, so I had no idea.
I tapped into the mini emergency fund money instead of touching my other sinking funds or actual emergency fund for the difference. One thing I do is keep my mini emergency fund in my sinking funds under a buffer category. This fund stays in my high yield savings account because I don’t plan to use it often. This way, it will help earn interest. I usually keep a couple hundred there.
3. SINKING FUNDS
Sinking funds are mini savings we keep for expenses we know will come up. For example, mine currently are credit card fee’s, clothes and shoes, daughter activities, travel, phone insurance, vehicle repairs and special occasions.
If you go completely over budget on something, then you can look at your other sinking funds and see what money you can move around. So, if you have $600 in special occasions but your sister’s birthday is still months away maybe you can tap into the special occasions bucket to cover the overage and then start saving again in the coming months for your sister’s big birthday bash!
4. EMERGENCY FUND
An emergency fund is usually the most common form of savings people have. But in reality, your emergency fund should only be touched in a real emergency. In times when you lose your job, where you can’t work for some reason, when someone hits your car, and you need to pay for things out of pocket while the insurance company reimburses you. Ideally, you wouldn’t be tapping into your emergency fund for small overages here and there.
Creating these layers keeps you out of debt and your money flowing easily. After getting out of over $18,000 of credit card debt, these layers of protection have saved me from going backward. I always recommend my clients put them into place.
If you haven’t started saving for an emergency fund, I also recommend a step-by-step process, so it doesn’t feel overwhelming. Let’s say you calculated that your emergency fund for 3 months needed to be over $11,000. That number can seem big and scary if you are starting to save or you can only save in small increments. So instead of scaring yourself with the number, break it down.
Start with saving for 3 months of basic needs only. This would be your true emergency situation where you need to pay your rent/mortgage (housing), car to get to work, insurance and expenses you need to live and get by. If you want to start even with a basic amount, start by challenging yourself to save $1,000 first. Then your first goal can be step 1 of saving toward 3 months of basic needs. Then, step 2, you save for 3 months of needs and wants.
In step 2, you can include your gym membership or Netflix or whatever wants to make your life better. Step 3 could be saving 3 months of your full monthly salary and so on. If you need to save for 6 months or 9 months, then just keep increasing your goal little by little.