Extraordinary times call for extraordinary measures.
As it relates to your household's finance4s, this means that when uncertain times are upon us — as they are now — it's time to take a good, hard look at the monthly budget and create a new one that reflects this uncertainty.
With industries worldwide collapsing, businesses have been forced to cut expenses rapidly, either laying off or furloughing workers just to keep afloat. That has resulted in 44 million Americans filing for unemployment in the 12 weeks alone.
It goes without saying that if you and/or a member of your family has lost all or part of their income, you'll need to re-work your budget to help your family stay afloat. This is especially true as states are struggling to keep up with the significant uptick in unemployment claims, meaning your fallback money will be delayed.
But even if your income hasn't been directly impacted by the coronavirus pandemic yet — or if you've only been minimally affected — it's still advisable to create a new budget for these uncertain times.
General Thoughts About Budgeting
Before we dive into specific tips and strategies for how to create a new budget for uncertain times, it's important to talk generally about the process.
If there were one word that would perfectly describe what a budget should be in times like these, it's “flexible.” With so much changing on a seemingly daily basis, it's important that you try to stay flexible as well. This means that the new budget you create today may have to change next month — and that's OK.
Also, keep in mind that this new budget you're creating may just be a temporary “just-in-case” budget, or it could be your “new normal” budget. In fact, it could start out as the former (if you haven't been affected yet) and turn into the latter (if you unfortunately eventually do).
Let's now take a step-by-step look at how to create a new budget for uncertain times.
Step #1: Review Your Current Budget
Before you create a brand new budget, you'll want to review the one you currently have set up.
The first category to look at is your income. When you're doing this, you'll want to see what your income estimate is on your budget, and compare that to what your actual income was for the last two to three months. Depending on how you do your budget — and how stable your income is — this may be the same, or it could be slightly different.
Now, you want to create an income forecast. If your income has changed because you've been laid off, furloughed or had your hours cut back, you'll want to make these changes on your budget worksheet.
You can put in the income you expect to get from unemployment — if you've applied — but make sure that you note for yourself that this is only an estimate. Also, keep in mind that unemployment income is likely to be delayed for several weeks, so you'll have a gap in your income. The most important thing is that you budget for your bottom line — not anything you hope or think will come through.
The second category to look at is obviously your expenses. Just like with income, you'll want to review your estimated expenses, your actual expenses over the last two to three months and your projected expenses going forward, if they've changed at all.
Most likely, your expenses haven't been affected as much just yet by the coronavirus pandemic. However, you may see that you have a shortfall once your new income is compared to your expenses.
Step #2: Categorize Your Expenses on a Micro Level
The key to creating a budget in uncertain times is to focus on your expenses. While you can't do much about your income — short of applying to as many extra jobs as possible, if you need it — you should be able to control at least some of your expenses.
When you're creating a new budget, you want to be as granular as you can. This means really drilling down and creating separate categories for all of your expenses. If you used to simply clump “household expenses” such as food, clothing and entertainment together, separate them out in your new budget. This will make it easier to track and make cuts if you can.
When you're categorizing your budget and entering the totals, highlight any categories in red that jump out as potential areas where you could cut back. In our example, we've highlighted Takeout Food, Entertainment and Clothing as three possible categories.
For now, don't make any adjustments, because there's one more thing to look at first …
Step #3: Work in an Emergency Fund
In our example, you'll see that there was no category listed for Emergency Fund. In stable times, this would be OK if your emergency fund is fully funded. Most financial advisors would suggest that this fund has three to six months' worth of your expenses in it, and is easily accessible in case you need it for immediate emergencies.
A 2018 report from the Federal Reserve found that only half of all Americans had three months' worth of expenses saved, though, and a whopping 40% said they would struggle to cover a $400 expense using only cash. This is why it's ultra-important that you have an emergency fund set up.
In uncertain times, it's even more important that you are starting an emergency fund, continuing to build yours up or even padding it beyond six months of expenses just in case.
This assumes, of course, that your income is currently higher than your expenses. If it is not, then other steps will obviously have to be taken first before you can contribute to a savings account of any kind.
In our example, you'll see there is a positive difference of $255 per month. While it is good that this hypothetical family is bringing in more money than they're spending each month, there isn't a lot of wiggle room.
Let's assume that this family has an emergency fund set up, but that it's only funded with three months' worth of expenses. As such, we'll set up a line item for emergency fund and aim to contribute $400 per month to it (highlighted in blue).
What you'll see when you do that, of course, is that this family now has a monthly deficit of $145.
Now it's time to make those adjustments to the categories you highlighted in red before.
Takeout Food is an easy category to reduce. Simply cook more meals at home, and you'll save money. Reduce that to $200 per month (or $50 per week), but also budget in an extra $50 for the added things you'll need from the grocery store.
Entertainment is easy to reduce, too. Try popping that down to $250 per month. Maybe that means staying home more (an easy thing to do during the coronavirus pandemic) and/or renting fewer movies online. During uncertain times, it's also simple to reduce spending on clothing. Try cutting that in half as well.
Once you've done these changes (which are highlighted in green), you'll have a new budget to work with — one that results in an excess of $295 per month, and includes contributions to an emergency fund.
Step #4: Make Changes if You're Still Short
The situation we've talked to before assumed that you brought in more money than you're spending. But what if that's not the case?
Let's go back to that same budget and highlight again in red categories that can be adjusted further. In this example, we'll start by cutting out Takeout Food altogether (and adding maybe another $50 to groceries), reducing Clothing even further, cutting out Charity altogether (temporarily) and chopping Gifts, Entertainment and Clothing in half.
This still results in a shortfall of $230 per month, as you'll see, but we'll try to hold off on cutting contributions to the Emergency Fund, or Retirement Savings, for now. If possible, see if there are other expenses you can cut back on.
Does the grocery shopping need to total $1,045? Or is there a way to cut that back? Do you have any credit card debt or other debt that can be put on a zero-interest credit card and pay slowly over time?
If there aren't any other moves that you can make, then it's time to slash contributions to your Emergency Fund and your Retirement Savings. But if you do this, don't delete them from your budget altogether. Instead, keep the line items there so that you know you want to work them back in when possible.
Stick to the Budget
Of course, all of this is just words and numbers on a spreadsheet. It's easy to make a change here and there to your expenses on a spreadsheet. It's a whole other thing to actually stick to that budget and make it all a reality.
The key to any successful budget — whether in stable or uncertain times — is to stick to it. And the best way to do that is to track all of your income and expenses on a monthly budget, down to the penny. Record everything in a separate running worksheet, and compare your actual totals from the month to your budget.
Then, as the months progress, continue to make changes to your budget (which is a forecast) based on your actual totals from the month before.