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Retooling Your Budget For COVID19 5 Smart Steps To Take Now
As the coronavirus continues to spread around the world and across the U.S., staying physically healthy is a top priority. At the same time, you likely are juggling new challenges where your finances are concerned.
You’re also not alone. As of the third week of March, a record 3.3 million Americans had filed for unemployment as restaurants, retailers and other businesses shut their doors in an effort to support social distancing and help contain the COVID-19 pandemic. An estimated 49% of Americans were living paycheck to paycheck even before the pandemic, meaning they have little to no savings to cover unexpected emergencies. The number of Americans feeling financial strain is likely to climb even further as unemployment rates and economic uncertainty mount.
While the federal government has just passed an economic stimulus package designed to put cash in the hands of many Americans, receiving one-time payments is only a short-term solution. Making an emergency budget for the long term can help if you’re experiencing tough financial times now or if you anticipate a job layoff or loss down the line.
Though it’s not an ideal situation, succeeding financially through this crisis may mean cutting back or cutting out certain expenses altogether to stay afloat. Reviewing your family budget should be a critical part of your coronavirus response strategy. Here are five steps you can take right now to manage your budget wisely while awaiting a return to something like normalcy.
1. Start With Your Income and Assets
There are two sides to budgeting: what you spend and what you earn. If your income has already taken a hit because of the coronavirus, you simply can’t continue to budget your money the same way.
The first step in budgeting amid coronavirus concerns is figuring out what your new baseline for income is if your hours have been cut or a job loss or layoff has affected your household. This can give you an idea of how deeply you’ll need to cut your budget.
For example, if you’ve experienced a 50% pay cut, then that may correspond to cutting 50% or more of your regular spending. This assumes that you’re spending the same amount you’re earning (or less) each month and not creating debt. If you were living above your means pre-COVID-19, then you may need to make even deeper cuts to get your budget to work.
On the income side of your budget equation, be sure to include the expanded unemployment benefits to which you may be entitled under the federal stimulus package. To supplement state unemployment benefits, individuals will receive an additional $600 per week for up to four months, and the eligibility period has been extended from the usual 26 weeks to a total of 39 weeks. In a major change, self-employed and freelance individuals who work as independent contractors are eligible for unemployment benefits under the stimulus package.
Next, look at what you have in savings that you might be able to tap into. Ideally, you have an emergency fund that can cover three to six months’ worth of expenses in place. But if you don’t, don’t panic.
Add up what you do have to see how you could use that to supplement your income. No amount of money is too big or too small. Even if you only have $500 or $1,000 in savings, that’s money you could use to help you cover your expenses until your income picks back up.
2. Categorize Your Budget Expenses
Cutting costs can make getting through the current financial situation less stressful. Before you can do that, however, you first need to understand where and how you are spending.
Whether you have a budget in place or you belong to the one third of Americans who don’t believe they need one, make a detailed list of everything you spend money on in a normal month. Start with your fixed expenses first. This includes everything you have to spend money on each month to maintain a basic standard of living, such as:
Debt repayment also could go on this list, since paying debts on time is critical for maintaining a good credit score. So if you have student loans, car loans or credit card debt, you’d add those here as well.
Make a second list of variable expenses, including discretionary spending. This list may include things such as:
Hobbies and entertainment
Personal care or self-care
You also may want to make a third list if you have irregular expenses that you don’t pay every month. For example, these might include car insurance premiums you pay biannually or property taxes you pay on your home once a year. Factoring those expenses in means you’re not surprised once those bills come due.
The key is to put every expense in your budget into its own categories. Another way to think of it is like this: must-haves, need-to-haves and nice-to-haves.
3. Eliminate or Reduce Nice-to-Haves
If you’re in disaster or emergency budgeting mode, prioritizing your expenses matters. For example, paying the rent or your mortgage and keeping the lights on should naturally take precedence over buying new clothes.
Some of the extras you may be able to immediately cut from your budget include:
Extracurriculars for kids
Electronics and gadgets
Ordinarily, removing these things from your budget might be painful. But if you’re currently under a shelter in place order or you’re simply being diligent about social distancing and staying home, then cutting out these expenses may be less of an ordeal.
Another nice-to-have expense category to cut is anything that’s outsourced. For example, if you pay someone for lawn care or dry cleaning, those are expenses you could temporarily put on pause. The goal is to trim as much of the fat as possible from your budget to preserve as much of your income and savings as possible.
4. Revisit Your Essential Spending
Once you’ve cut the fluff out of your budget, you can take a second look at your essential spending.
Start with what’s likely your biggest expense, which is housing. If you’re a homeowner, there may be a silver lining amid the coronavirus crisis, in that the federal stimulus package includes relief for those with federally backed mortgage loans. If you have an outstanding mortgage and you’re concerned about falling behind on payments, don’t hesitate to reach out to your lender. They can walk you through what your options are, if any, for reducing or suspending your mortgage payments temporarily.
Something else to consider: refinancing your home loan. With mortgage loan rates at or nearing historic lows, you may have an opportunity to refinance your mortgage at a lower rate. If that results in a lower payment, that could save you money on housing costs. Keep in mind that refinancing may require you to pay closing costs, unless you’re looking into a no closing cost refinance.
And think carefully about tapping into your home’s equity. Low rates can make a home equity loan or home equity line of credit (HELOC) an attractive option, but if the slowdown in economic activity spurred by the coronavirus leads the economy into a recession, your home’s value could take a dip. In that scenario, you might find yourself upside down in the home.
If you rent instead of own, your options for managing rent payments may be narrower. But the good news is that a number of states and cities have enacted a moratorium on evictions Ideally, you should continue paying rent on time each month. But if you can’t because your income has taken a hard hit, you may be insulated from legal action, at least in the short term.
Similarly, many utility companies are suspending disconnections for nonpayment while states and municipalities fight against COVID-19. So if you can’t pay these expenses you won’t lose service, although you will have to get caught up on them at some point.
Also, pay attention to what you can do to make your debt load more manageable when cash is short. The coronavirus stimulus package provides relief for federal student loan borrowers including the temporary suspension of payments. This doesn’t apply to private student loans, however. If you have private loans, you’ll want to reach out to your loan servicer to see whether a deferment or forbearance is possible.
Likewise, stay in touch with your credit card issuers as well. Many credit card companies offer hardship programs that allow you to lower or suspend your payments or reduce your interest rate for a set time period. This can make paying down your balance more affordable when money is tight.
5. Spend Strategically to Save Money
While cutting back on spending can help make budgeting easier during a financial crisis, it’s likely that you won’t be able to stop spending completely. But there are some ways that you can save money as you spend, starting with using cash back apps.
Cash back apps pay you back a percentage of your purchases in cash or rewards that you can redeem for cash. So if you spend $100 on groceries or $20 take out, you might be able to earn 3% or 5% of that back.
These apps can be paired with cash back credit cards to double up on rewards. But it’s important to be cautious about charging expenses on credit cards when your income or financial situation is uncertain.
While you may save money by earning cash back, you may hand it right back to the credit card company in interest charges if you carry a balance. At the end of the day, creating new debt can work against you if you’re trying to minimize spending and stretch your dollars as far as possible.
Just two weeks ago, you may have been considering doing a 90 day budget review to be sure your finances were on track. Whether or not that makes sense now depends on how quickly you and your family’s finances are being affected by the disruption of the COVID-19 crisis. If your existing budget is fundamentally changed, it makes sense to take a deep breath, consider what options are available now and revise as needed.
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