You may know the feeling: the washing machine makes a strange noise and your stomach tightens. Not because a washing machine is so important, but because you immediately start doing the sums. What if it’s broken? Where will I find the money? Will I have to put something else off? Within seconds, a small incident becomes a source of stress.
Someone with a financial buffer hears the same noise and thinks: annoying, but we’ll sort it out. The difference is not in the washing machine, but in what is ready behind the scenes. Much has already been written about how big a buffer should be. In this article we look at something else: why a buffer has such a strong effect on your mind, your sleep and your peace of mind.
Financial resilience: more than a number
Financial resilience is the ability to absorb a financial blow without your whole life being thrown off balance. In 2015 the US Consumer Financial Protection Bureau (CFPB) investigated what people themselves understand by financial well-being. One of the four elements that emerged was precisely this: having the capacity to absorb a financial shock. The other three were having control over your day-to-day finances, being on track to meet your goals and having the freedom to make choices that let you enjoy life.
What stands out is that, in that research, financial well-being was not only about income, but also about how you feel about your money. Other research points in the same direction. Psychologists Peter Ruberton, Joe Gladstone and Sonja Lyubomirsky (2016) found that the money you have readily available, in your current and savings accounts, was more strongly linked to life satisfaction than your income or your investments. A buffer therefore gives you something a higher salary does not automatically give: the feeling that you can handle a setback.
Why a buffer takes the load off your mind
To understand why a buffer is so reassuring, the research of Sendhil Mullainathan and Eldar Shafir helps. In their book Scarcity (2013) they describe how a shortage of money changes the way you think. When money is tight, you start thinking in a tunnel: all your attention goes to the most pressing problem. That is sometimes useful, but it takes up a lot of mental space, which they call “bandwidth”. Less is left over for planning, patience and good decisions.
In a study in the journal Science (Mani, Mullainathan, Shafir and Zhao, 2013), the researchers tested sugarcane farmers in India before and after the harvest. Before the harvest, when the money had run out, the same farmers scored worse on thinking tasks than afterwards, when they had just been paid. They were the same people; only their financial situation differed. Money worries do not make you less intelligent, then, but they do temporarily take up part of your thinking power.
A buffer works against this as a kind of shock absorber. An unexpected invoice becomes a problem you solve, rather than a crisis that occupies your whole mind. That is why we call it a psychological safety net: it absorbs not only costs, but also panic.
An example: Youssef
Youssef (29) works as a nurse. He earns a fair salary, but every month his account was all but empty towards the end. “I had no big debts, but every unexpected cost felt like a disaster,” he says. “A trip to the dentist or a birthday present, and I’d be lying awake at night doing the sums.”
He decided to have 50 euros transferred automatically to a separate savings account on the day his salary comes in. A modest amount, but he barely noticed it. After six months there was 300 euros in it. “That seems like very little, but when my bike was stolen I could buy a second-hand one straight away without any stress. That was the first time I felt what a buffer does.” He has since increased the amount. More importantly still: he sleeps better.
There is no amount that is right for everyone. A commonly used rule of thumb is a reserve of three to six months of fixed costs, but your situation makes a big difference: do you have a fixed or variable income, do you live alone or with a family, are you self-employed? Many governments and consumer organisations offer independent information about saving for unforeseen expenses. Find out what is available in your country. Above all, start small. A first buffer of a few hundred euros already brings peace of mind.
How to turn your buffer into a real safety net
A buffer works best when it is clear, accessible and protected. These steps can help:
- Give your buffer a place of its own. As early as the 1980s, economist Richard Thaler described how people divide money into mental pots, which he called mental accounting. You can use this to your advantage: a separate savings account with a clear name, such as “safety net”, makes it less tempting to use the money for something else.
- Automate. A standing order on the day your salary comes in means you don’t have to decide again every month. That way your buffer does not depend on your willpower or your mood.
- Start with a first milestone. A goal of six months of fixed costs can feel daunting. A first goal of, say, 500 euros is more tangible, and you feel the effect sooner.
- Agree with yourself when you will use it. Write down what counts as a real emergency for you: a repair, a medical cost, a temporary loss of income. A new smartphone or a city break does not count. That way your buffer does not become a second current account.
- Top it up without guilt. A buffer is there to be used. If you have dipped into it, it has done its job. Simply start topping it up again.
A short exercise: how does your safety net feel?
Imagine you receive an unexpected invoice for 500 euros tomorrow. Pause for a moment on your first reaction. Do you feel tension in your stomach, do you immediately start doing the sums, or do you think: I can manage that? Give your feeling a score from 1 (panic) to 10 (completely calm).
Ask yourself the same question again in three months, after you have taken a few steps. The score often shifts faster than the balance in your account would suggest. That is because you are building up not only money, but also the confidence that you can handle a setback. If you want to know which amount suits your situation, use the tool How big should your emergency buffer be?.
Peace of mind as a return
Savings are often discussed in terms of interest and returns. But the most important thing a buffer gives you does not appear on your bank statement: sleeping more soundly, being able to think more clearly when something goes wrong, and depending less on expensive credit at the worst possible moment. In that sense, a buffer is a form of financial self-care. You are looking after your future self today, and on a difficult day that self will be grateful.
If you can’t manage to put money aside because your income is simply too tight, that is not down to your willpower. In that case it makes sense to look at your full budget together with someone first. If you want to learn how to create more overview and room step by step, the online course You can learn to budget will guide you.