Back to Budget Basics
There’s an adage in financial planning circles that goes like this: “The best time to make a budget is yesterday. The second-best time is today.”
The “today” most of us find ourselves in is a day darkened by a devastating global pandemic and a historic economic downturn. In that kind of uneasy environment, making a plan for saving smartly and spending wisely is crucial. If you didn’t create that plan yesterday, you can make this your “today” by following these six rules for budgeting during a downturn.
Rule No. 1: Start with an inventory.
“It's hard to figure out how you can save money if you don't know where you're actually spending money to begin with,” said Stefanie O'Connell Rodriguez, a personal finance author in New York.
Experts suggest you start by scouring the past three months of expenses to get a sense of what you’re spending money on. Check your bank statements and credit card statements and make a list of the biggest expenses as well as the minor outlays — especially ones that reoccur, like a subscription or a daily trip to a coffee shop. Break those expenses down into two categories, essentials and nonessentials. Then start weeding out the nonessentials.
That will help you save. But the main target should be to identify your biggest expenses
— housing, transportation, food, including any loans you may have. Can you refinance your mortgage or student loans and change payment terms to credit card issuers? Will your auto insurer switch your plan to one that’s less pricey? Do you have high food bills related to ordering in or eating out a lot? That may sort itself out, of course, as businesses reopen. If so, make whatever adjustments you can to save big chunks of money. That includes ordering out from home, even when supporting your favorite local restaurants.
The bottom line: Understand what you are spending each month and what you have to spend. Then decide what you want to spend. That’s your budget.
Rule No. 2: Continually reassess the plan.
It's recommended clients check mid-month on their spending habits to see if they’re on target or if they’ve forgotten to account for some important things. “Make adjustments midmonth if you need to and then decide if you can keep things in check,” he said.
To do that, put the spending plan down in a digital spreadsheet, or on a piece of paper, or use one of the many financial planning apps available. Many experts recommend aggregation services that bring all of your credit card and banking accounts into one place.
Also, experts say your spending plan should have some flexibility for the unexpected, like a car repair. If you find the unexpected happens a lot, your spending plan should change.
Rule No. 3: Keep your investments flowing — if you can afford to.
A downturn can wreak havoc on the stock market. But advisors suggest that most people who have investments should keep them unless finances have gotten extremely tight. “The market, if you’re properly diversified, always come back,” he said.
Still, for those in a cash crunch, who don’t have an emergency fund that will cover six months of basic expenses, O'Connell Rodriguez says it might make sense “to temporarily scale back on retirement contributions to prioritize short-term savings.”
Rule No. 4: Consider a (very) rainy day plan.
Because anyone’s personal finances could take a hit during an unpredictable downturn, it makes sense to plan for worst-case scenarios, whether you think they’re likely or not.
“Make a list of difficult decisions you may have to consider in the case that you lose substantial income long term,” says Thomas Nitzsche of Money Management International, a nonprofit financial education organization.
Rule No. 5: If cash is crunched, don’t turn to debt unless you have to.
“The last thing you want to be forced to do is to go into further debt if you don't have to,” says Brittany Kline, who, along with her husband, runs The Savvy Couple, a financial site devoted to families. Still, if you must borrow to pay bills, consider taking a loan against your 401k, getting a personal loan, borrowing against the equity in your home, or, at least, looking for a credit card with a zero percent interest rate.
Rule No. 6: Get (free) help if you need it.
If you’re having real trouble navigating the stormy seas of an economic downturn, there are options. Multiple new federal and state relief programs have been created in recent weeks, for instance. Also, many creditors offer hardship programs to borrowers.
American Airlines Federal Credit Union offers financial advising services to members.
During this uncertain time, the Credit Union has offered loan deferrals on all eligible consumer loan payments and emergency loans to help members with immediate needs. For more information, visit AACreditUnion.org or call (800) 533-0035.