How to Build a Budget Buffer

1. Examine Your Current Budget

Before you create a budget buffer, it’s a good idea to take a look at your budget. When’s the last time you looked over your spending categories and the amount of money you intend to spend in each category? In general, are you sticking with your budget, or finding that you end up going over in certain categories each month? If so, it may be a good idea to adjust your targets, perhaps dialing down spending in one category (such as retail) to allocate toward a category where you tend to spend more (such as groceries or dining).

In addition to checking in with your spending goals, ask yourself if your budgeting method is working well for you. Are you using a budgeting method such as the 50/30/20 budget, zero-based budget plan or envelope budgeting? If so, is this method still working for you? If you find your budget too rigid or too relaxed, consider looking into a new budgeting plan or try a new budgeting app.

2. Set a Goal Amount

After you go over your current budget and get a feel for how well you’re sticking with your spending plan, set a goal amount for your budget buffer. Your budget buffer is a sinking fund that you’ll put money into on a regular basis, and only take money out when you need to.

Unlike an emergency fund, which should ideally cover anywhere from three to six months’ expenses or more, a budget buffer just needs to be large enough to cover any incidental, unplanned spending you do in a given pay period.

That number depends on your preferences, your spending habits and how much extra income you can afford to set aside after meeting your other saving goals. You may only need around $100 or $200 set aside as a budget buffer. Some may prefer to keep anywhere from $500 to $1,000 in a buffer fund.

Once you reach your budget buffer goal amount, you can keep up the momentum by setting aside the same monthly amount toward another goal, such as saving for a down payment on a house, creating a college savings fund or funding another large purchase

3. Open a High-Yield Savings Account

Consider opening a high-yield savings account and dedicating it to housing your buffer funds. It’s smart to keep your budget buffer in a savings account separate from your everyday checking.

It’s also a good idea to keep your budget buffer in an account apart from your emergency fund. Remember, your emergency fund should be set aside for true emergencies. A budget buffer is more flexible, and can be used to cover overspending that isn’t an emergency.

4. Free Up Funds

If you’re breaking even (or ending up in the red) each month, you’ll need to free up funds to contribute to your buffer. You could consider trimming discretionary spending to find more funds, such as by cutting dining out for a couple of weeks. You could also try spending less at the grocery store by creating a low-cost meal plan for the week or using a coupon app.

As an alternative or in combination with cutting back spending, consider looking for ways to bring in additional income to contribute toward your buffer—and other financial goals, such as contributing to retirement savings, building a larger emergency fund or paying off debt. You could ask your current employer for additional shifts or overtime, if they allow it. You could also consider looking for an additional part-time job or exploring ways to earn money from home.

5. Set Up Automatic Transfers

The key to successfully funding your budget buffer is to sink a small amount of money into your fund each paycheck. Set up an automatic transfer into the savings account where you’ll keep your buffer. Directing a relatively small amount, such as $20, or whatever number works well for you, into a sinking fund can help you build up a sizable buffer within a few months.

6. Don’t Dip Into Your Funds

A budget buffer is money you don’t intend to use. It’s there for you when you go off track with spending, which provides some security and a cushion for your budget. But if you see your budget buffer as money that’s available to use, then you’ll spend it. While your buffer exists to ensure that small fluctuations in spending don’t throw you off budget, you don’t want to treat the funds as spending money. Otherwise, they won’t be there for you at a later date when a bill turns out to be more than you expected.

7. Replenish Your Buffer

When you do need to dip into your budget buffer, make a plan to replenish the funds you use as soon as possible. One idea is to cut back spending in your next pay period and route the money you save directly into your buffer.

You could also try taking on a savings challenge, such as a weekend no-spend challenge. See how much you can reduce your spending by simply cutting out retail, entertainment and dining, then direct the difference into savings.

The Bottom Line

A budget buffer can be a helpful tool for ensuring fluctuations in your spending don’t blow your budget to pieces. That can help you increase financial stability and feel more empowered to stick with your spending plan.

Remember that a budget buffer isn’t a replacement for a true emergency fund, which is a larger safety net that’s there in a true crisis: a loss of income, a large emergency bill or the like. Make sure you’re funding other savings goals and keeping your eye on long-term financial goals, too, such as saving for retirement or putting a down payment on a house.