There are many Personal Finance terms and this is not really one of them. In fact, I think maybe it’s just me who uses this. LOL. Or maybe others call it by different names. But let’s take a look at what a Buffer Fund is, how I use it, and why I’d recommend it to everyone.
Firstly, what is a buffer fund?
A buffer fund can either be a separate category in ones budget or it can be an actual savings account. I prefer to simply have a category in my budgeting app whereas my partner prefers a separate savings pocket in his banking app. So it’s really up to you. But, more importantly, what is a buffer fund for? Take a look at these scenarios and see if any apply to you:
- You go out for dinner with friends and someone doesn’t have money with them. You pay the bill knowing that they will pay you back (although it may take a week or two).
- There’s something that you’ve been saving for, and it’s definitely budgeted for, but in the end it costs more than expected.
- A great opportunity arises for something you have been thinking about, but not necessarily budgeted for. (eg a weekend away, spa day, shoes).
- A friend that you haven’t seen for months invites you out for dinner, but your “eating out” budget is used up for the month.
- Your partner needs to borrow some money and will pay you back in 2 months time.
So, as you see, these are not emergencies. Rather, they’re cash flow issues (when people borrow money), and they are opportunity expenses. If you have been saving up for a pair of Levies denims and they are suddenly on a 50% special, you may as well get them now!
This isn’t really a fund for anything, but rather a way to keep your cash flow stable, stick to your budget, but have a little breathing room. A buffer in your budget.
What is an emergency fund then?
An Emergency Fund is similar. It’s also a buffer in you budget. BUT… An emergency fund is for unexpected and unavoidable expenses.
Think of it like this… a Buffer Fund is for “nice to have” extras or to bulk up your budget when an opportunity arises. An Emergency Fund however is for expenses that are completely unplanned for and which are out of your control. You have no choice but to spend the money.
An Emergency Fund could be used for items such as:
- your insurance excess after a claim,
- unexpected and unplanned car maintenance,
- medical events,
- unplanned compulsory school expenses,
- pet-related medical emergencies,
- issues with close family members.
I’ve written a lot about emergency funds before. Here are two to start with:
How to build an Emergency Fund
Where to save an Emergency Fund
How much should you have in a Buffer Fund?
So this is a tricky one. In one sense, if you have too much money in this fund, you’ll rely on it more and more and neglect your budget. This fund shouldn’t be seen as a “miscellaneous” category in your budget with which you can go wild. There should be thought and consequence when spending from this fund.
As I track my spending each month, and have done so for over 4 years, I know where my money is going and what my cash flow is like. I’ve settled on an amount of R12,000 for my buffer fund.
This is based on the fact that my partner sometimes uses my credit card for business expenses which he then repays 3-4 weeks later. I have also accounted for actual expenses that I’ve used this fund for, as well as a slight extra amount for the unknown. So that’s like having a buffer amount in my buffer fund. LOL. As you can expect, I have a smooth cash flow each month.
When calculating your own amount, take a look at the recent expenses that your budget didn’t quite cover. You may feel that just R1000 is sufficient, or a little more or a little less. It really depends on your circumstances and your current cash flow. And of course if you have debt, it’s far more tricky. (See how to get out of debt)
How I manage my cash flow each month
So here is what I do each month after pay day.
1 – Set the following months budget
I have a pretty static budget but I like to reassess each month. I just found out that niece is getting married in December, so I’ll start saving a little extra from next month. As you know, things change month by month so you need to plan as best you can with the information you have at hand.
2 – Check the balances in my Emergency and Buffer Funds
I generally know how much I have in both my Emergency and my Buffer Fund, but I like to check this when finalising my budget. My Emergency Fund has about 5 months worth of expenses saved up, and my Buffer Fund sits at R12k. If I’ve spent money from either fund, I’ll make a plan as to how to top it up. Depending on the amount I can either do it straight-away (now that I got paid) or perhaps I need to plan to save a little extra over the next few months. Of course if people owe me money, then I’ll just wait for them to repay it and I’ll allocate it to the buffer fund.
If you notice that you are forever trying to top up these funds then you should consider refining your budget. Perhaps you have monthly expenses that you are not accounting for properly in your budget.
3 – Pay my investments
Although some of my investments are automated (via debit order), some I do manually. I usually do these a day or two after payday – once the budget is finalised.
4 – Start the month
And now I just go through the month spending as needed and within my budget. My Emergency Fund will cover the major emergencies that pop up and my buffer Fund any smaller “glitches” in the budget.
This is why you need a Buffer Fund
Okay so this probably sounds too simple. It is! I’m debt-free and can mange my money easily month-to-month.
But, it’s taken around 3 years to really get into a cash flow “rhythm”. I spent a lot of focus paying off debt and fixing my cash flow. I’m now at a point that when I receive my salary, it’s all budgeted for the following month. So if I get paid on the 25th of the month, I don’t need to touch the money until the new month starts.
How to fix your cash flow
An Emergency Fund and a Buffer Fund both contribute to fixing your cash flow. Another important factor is getting rid of debt. None of these are necessarily easy, but it can all be done. Here are 4 posts to read now:
Why you need an Emergency Fund
I’ve not heard of this concept but it makes sense.
Actually I do something similar. I have an account that I call my “Unplanned Expenses” – used for unexpected things or loans/gifts. This is seperate from my “Annual Expenses” that I also have where I save (automatically) each payday for the annual expenses that I know I will have over the next 12 months.
I personally find that seperate accounts work better for me as if the money is in my living account my mind goes “oohh I have money, l want that!, I spent that!, oops – that was supposed to be for. xyz”
I opened up those accounts with the minimum allowed to open a seperate savings account, and then set up automatic transfers – which were only $5.00 originally – which seemed ridiculous – but getting in the habit of saving is more critical than the amount. And as you see the amount increasing, it becomes easier to believe -“ooh, I can really save $10 instead of $5” and so on
Cool – sounds like you have things sorted! And yes, I know what you mean about keeping the money separate…. lol…
Great post! I just recently worked this out myself but I like that you have a cap of sorts. I have three categories that I can pull from throughout the month. One is my ongoing new car fund, my yearly extra retirement fund and investment savings. They each have a monthly amount that I put in one month but don’t move it to savings, or wherever, til the next month. So when I want to use the funds I really have to think about it before I use them. But I like the idea of a category that would feel less drastic if I used it. I will be thinking on this.
Thanks. It’s all about doing what works for you and tweaking it along the way. 🙂