The COVID-19 pandemic has taught us all a lot. It has especially taught us how quickly life can change and how easy it is to lose your income and even your life. Of course, we can’t control whether a global pandemic starts (or even how long it lasts, apparently), but we can plan ahead so we know what to expect when financial hardship strikes. should do. That’s why it’s so important to take a moment and create a worst-case budget for yourself and your family. Here’s how you can get started:
Get Clear on Your Fixed Expenses
One of the first steps in gaining control of your budget is understanding how much money you charge. Of course spend every month. Fixed expenses are expenses that generally remain the same every month or expenses that you have to pay or will result in. This may include things such as:
- loan/debt payment
- Health care costs, such as co-pays and prescriptions
When you have a clear list of your fixed expenses, you have a good start to your budget. You will understand how much money to spend each month to keep yourself indoors and warm. Plus, you might be surprised by some of these expenses that you forgot. This can be a good opportunity to cancel or negotiate items for which you no longer want to pay.
Identify which expenses can be deducted
Obviously, there are some expenses that we cannot prevent or cut out completely. Things like rent, utilities and food are a must. However, in times of crisis, we often need to sacrifice something and cut out some things. Clarify what fixed expenses you will be able to protect and reduce if you lose your income or have another financial emergency. That way, if a crisis strikes, you’ll know exactly which expenses to cut, cut or pause. This will take some of the tension out of the situation when the time comes.
Not only can loan and student loan payments be put off, but there can also be an opportunity for flexibility. If you have federal student loans, you can put your loans into forbearance if you are in a moment of financial difficulty. Alternatively, even if you have a personal loan, you can reach out to the lender or bank to see if they are willing to help you. At the start of the pandemic, many banks were helping customers struggling to make payments. Understanding what your options are ahead of time will help you when a crisis strikes.
Review your specific flexible spending
Flexible spending is an expense over which you generally have more control, but that doesn’t mean it’s all spending that can be deducted entirely. These categories may include:
- Food (groceries and food)
- Transport (Gas, Cab or Public Transport)
- Shopping (clothing, toiletries, etc.)
Several items that fall under flexible spending are important and even mandatory. But it’s still necessary to understand how much you spend outside of your fixed costs. If you don’t know how much you’re spending, it’s impossible to make changes if necessary. This exercise will help you identify if you are overspending in certain areas. It can also help you understand what may be reduced or cut out entirely if you run into financial difficulty.
Know how much money you can live off
Once you are clear about what can and cannot be deducted at all, you will have clarity about how much money is the least you can possibly survive with. You want to make sure you’re prioritizing food, transportation, health care, and anything else that’s important to you and your family’s overall well-being. If you lose your job, and you drastically reduce your household expenses, this will help reduce the amount of debt you have to earn, or reduce the amount you have to withdraw from savings. . Remember, hopefully this restriction will be temporary, until you are back on your feet.
Prioritize your emergency fund
Prioritizing your emergency savings account funding should always be top of mind. This should be even more apparent after what we have experienced over the past two years. Anything can happen at any time, and it is very important to set aside money to protect us and our families during a crisis. If you haven’t already started saving for emergencies, start today. Even if you need to start at $5 a month, do it. You can increase it over time. If you already have an emergency fund, look back at it to make sure you’re comfortable with the balance. How long can you survive on your worst-case budget if you only have your savings to use? If that scares you, it’s time to start increasing your savings.
Keep a record of your worst-case budget
Once you’ve done all this work to create a worst-case budget, make sure you actually save the information! Make a spreadsheet or a list of your expenses that will remain and expenses that will be deducted. That way, you’ll know what steps you need to take in times of crisis. Don’t over-stress yourself by asking yourself to go through this process again when the inevitable happens.
Hopefully you won’t need this worst-case budget, but if you do you’ll be glad you have it!