Your Broke Amount
What Is A Broke Amount?
It’s an amount of money you keep in your current account that you never let yourself go under - your personal version of £0. If you dip into it, you replenish it sharpish.
Cash Flow For Real People
Cash flow is king in business. When I had my shop, I could have £20,000 of yarn sat on the shelves but if I needed an order and couldn't afford to pay my bills then the £20,000 meant very little, practically.
Businesses are different from humans. When cash flow dips, a business can market, discount or sell stock. Individuals can’t magic up money in the same way - we have to create the safety in advance.
So, the point of a 'broke amount' when it comes to your cash flow, is to have an amount which you consider to be your £0, so you’re never actually at £0.
Your Emergency Fund and Your Broke Amount
I consider your ‘broke amount’ to be part of your emergency fund - it just lives in your current account rather than savings.
You're very unlikely to be getting any interest on it because it's sat in your current account, so it needs to be a fairly low figure. If your emergency fund is £4,000 then you might keep £400 of it in your current account and the other £3,600 in the emergency fund.
It forms part of the web of finances that you will build. It means that when your income hits your account, each penny can be sent off to do its job (bills, top up emergency and sinking funds, debt pay off, investments etc.) leaving you with little cushion so you never get into your overdraft.
So it's fulfilling a role in your emergency fund, in your cash flow, and in your mental self-soothing so that you can take some risks.
Can you see how that would work to protect your cash flow and your nervous system?
How Do I Build My Broke Amount?
In the same way you build your emergency fund.
Either with some money you have lying around waiting for a job, or a bit at a time. Remember - £10 is better than nothing when it comes to creating your own personal cash flow cushion.
There Are Alternatives To A Broke Amount
I'm not instructing you in what to do here - I am suggesting you have a think about the route that money takes in your life. Because there's almost certainly another way to do it which could be simpler, or could earn you more money to help you build your wealth.
A great example of this would be having access to a cash back, or reward credit card, where the limit is at least your emergency fund. Imagine paying for that last minute, pre-Christmas oven replacement with your credit card, earn 1% cashback and then paying it straight back from your emergency fund. Sounds like a sensible idea to me!
This only works if you’re confident you’ll pay it off in full immediately and won’t carry a balance. There are good reasons why you might not want a credit card, or are able to get one, of course, but if it's an option - why wouldn't you?
Clarify, Simplify and Leverage Your Money
A key part of all of this emergency fund and broke amount business though, is to think about it once (or maybe once a year), work out what you want to do and then set it in place. Especially if you have a tendency to overthink and add little bits here and there like I do, we're not looking to spend our entire life on our finances - we're looking to clarify, simplify and leverage what we've got.
My audience - you lovely lot - are a part of the huge number of people who are saving rather than investing.
You want to feel safe, you want to have your money available to you, you don't want to have it all locked away. And I get that, there are definitely reasons to feel like that, but what I would love, is for each of us to take some time to work out what safety actually means - because I truly believe it'll put us on the path to wealth creation.
This week's newsletter is about what an emergency actually looks like, how safe you actually are and how that might not be exactly what you're imagining.
Love Eleanor. xxx
