End of December 2019, I suggested the need to Recession-Proof Your Budget. I mentioned three things that were key in preparing for a time of financial hardship: Reducing Debt, Diversifying Your Income, and Creating an Emergency Budget. I hope many of you began that process and are in a better position financially than you may have been otherwise. If not, now is the time to act! Today I’d like to go into greater detail about how to create and maintain an emergency budget.
Start with Your Current Budget
Do you already budget? You may use paper, spreadsheet, an App, or another tool. Any of these methods is fine. If you don’t currently track your normal monthly spending, this is Step #1. You can access Apprisen’s Basic Cash Flow Statement and use this to begin capturing your current spending. Once you have an accounting of your current expenses, it is time to start crafting your Emergency Budget.
First Pass – Cut Non-Essential Spending
Do this even if you have a fully funded Emergency Savings Account in place. You can’t predict how long the economic downturn will last, or how long you may be out of work, or living on a reduced income. Every dollar you save today is a dollar available when you may need it in the coming weeks.
Go line by line through your budget asking yourself the question, “Is this expense a want or a need?” You may have some easy cuts: dining out, gym memberships, and recreation expenses. Things you spent money on that now aren’t possible due to the stay-at-home recommendation.
Given the amount of time we are spending at home, we now have “essential” non-essential expenses. You may not be inclined to cancel your cable or streaming subscriptions since they provide a needed distraction to isolation. You should call these providers, state you are experiencing a financial hardship, and ask for a discount. Many providers will be willing to give you at least a six-month discount to keep your business.
Second Pass – Repurpose Your Savings
Financial goals are key to building wealth and it’s critical to contribute regularly to your retirement accounts. But during an emergency, you should conserve money and build your emergency savings. Are you still working? If you don’t have a fully funded emergency savings account, you may want to hit “pause” on investing and shift those funds to savings instead. Consult your Financial Advisor first to ensure you’re making an informed decision. Have you been saving money for a new computer or other large purchase? Hold off on buying that item and keep the funds in reserve for an emergency. If this crisis ends and you haven’t needed your emergency funds, you can make a lump sum deposit to your retirement account. And merchants may be offering deep discounts on other products that have been languishing on store shelves.
Third Pass – Reduce Essential Expenses
If your current income still doesn’t support your budgeted spending it is time to dig even deeper. Mortgage? Call your lender and ask what concessions are available. Be vigilant in keeping lights turned off. Turn your thermostat down from 72 degrees to 65 degrees and put on another layer of clothing. You may want to turn the temperature down on your hot water heater and take shorter showers. Do you normally buy organic groceries? You may need to switch from Whole Foods to Aldi temporarily to cut your grocery expense. Remember, this isn’t a forever budget. But these sacrifices might be necessary for a while.
I’ve Cut My Expenses and I Still Can’t Pay My Bills
Reach out and ask for assistance. Make an appointment or talk to a Financial Specialist by calling 800-355-2227 to get help prioritizing expenses and establishing an emergency budget. The sessions are free. The sooner you ask for help, the less stressful your situation may become.