Lesson 23 of 25 · 6 min

A savings buffer as headroom, measured in months of payments

A savings buffer measured in months of payments is headroom expressed as time, not as a percent.

A savings buffer measured in months of payments is headroom. Track 1 lesson 7 is headroom in dollars and in percent of collateral: how far things can move before a test fails. This lesson does not re-teach that percent. It points the same distance at a household clock. The unit is months of the obligation stack, not a loan-to-value gap.

Invented cash $12,480. Monthly obligations are the four-line sum from lesson 20, before the BNPL: car $466.02 + housing PI $1,986.45 + card minimum $215 + personal $95 = $2,762.47. Buffer in months is $12,480 ÷ $2,762.47 = 4.52. Four and a half months of that stack sit in cash. The 4.52 is a distance. It is not a recommendation to hold cash, and it is not a budgeting rule.

buffer in months = cash ÷ monthly obligations

cash: The buffer being measured. Here $12,480.
monthly obligations: The stack the buffer is expressed against. Here $2,762.47.
buffer in months: Headroom as time. Here 4.52. Track 1 lesson 7's distance, in a different unit.

Headroom on a pledged portfolio shrinks when the mark falls or the loan rises. Headroom as months shrinks when cash falls or the monthly stack rises. The posted rates on the car, the house, the card and the personal loan can sit still while 4.52 moves, because 4.52 is a quotient of two household numbers, not of a rate. Lesson 24 computes that move. This lesson is the unit.

4.52 months is headroom. The $12,480 is the numerator. The $2,762.47 is the stack. The percent-of-collateral version is Track 1 lesson 7 and is not re-taught.

Key terms

Savings buffer: Cash expressed as a multiple of the monthly obligation stack. On these figures, 4.52 months.
Months of payments: The unit. Cash divided by the stack. Headroom as time rather than as a percent of collateral.
Obligation stack: The monthly claims the buffer is measured against. Here $2,762.47, the four-line sum.

Worked example

Cash as a multiple of the stack

Cash $12,480. Car $466.02, housing PI $1,986.45, card minimum $215, personal $95.

Obligation stack: $2,762.47
Cash: $12,480
Buffer in months: 4.52
What the 4.52 is: Headroom as time
What the 4.52 is not: A rate

Twelve thousand four hundred and eighty dollars is 4.52 months of $2,762.47. That multiple is headroom.

Check yourself

Cash $8,640. Monthly obligations $2,140. What is the buffer in months?

A savings buffer measured in months of payments is headroom, Track 1 lesson 7, expressed in time rather than in a percent of collateral. Open Headroom, in dollars and in percent →

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.