A cushion has several meanings in personal finance and investing. In personal finance, a financial cushion is a reserve account used to ensure a person’s money doesn’t run out after automated transactions occur. When payments and other automated transfers coincide or are scheduled too closely together, the amount in an individual’s debit or checking account may be wiped out, resulting in overdrafts. To avoid the hefty fees that come with overdrafts, many people create a financial cushion. The amount of money deposited in a financial cushion is determined by the amount of your average automated transactions.
The term cushion is also used in investment. It refers to the period of time during which a bond cannot be called. Another investment term where the word cushion is used in “safety cushion,” which refers to the amount of money invested that a fund manager is allowed to lose before the fund portfolio is shifted from capital gain (stocks) to capital protection (bond and/or money market). The “safety cushion” is determined by the risk tolerance of the investor.
