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This week, after 2 months of stay-at-home time, I checked my household expenses and compared them to my "normal" monthly expenses (during the last 12 months): Here is what I found:
We can assume that the impacts from COVID19 will stay with us for the rest of this year, at least. So we need an update on the budget for this time period!
Since the process is a bit different compared to "normal" times, I will outline the steps needed:
1. Check your income:
If you were impacted by pay cuts or job loss, update your salary figures (take-at-home number).
If you receive any other benefits like unemployment benefits, list those also, including their duration.
2. Check your expenses during the last two months:
Hopefully, you already have a budget and followed your expenses. In this case, you simply need to check how much your spending was during the last two months. Make a list.
If you don't have those numbers:
1. Create spending categories for regular expenses like basic services (like utilities, insurances, housing cost, phone subscription), additional regular services (lawn care, dog sitter, child care) and debt repayment costs.
Then add the variable expenses like food, clothes, personal care, entertainment, eating out, recreation, subscription services, etc.
3. Dig into the receipts for the last two months to find out how much you have spent on the different categories.
Don't forget to account for expenses not occurring every month (like yearly insurance payments). Set aside money monthly to cover the bill once it comes due.
3. Check your income and expenses during two more typical months (maybe March and April 2019)?:
Apply the same categories for this time period and put down those numbers also. This gives you a baseline data for estimating the regular spending.
4. Check your savings:
You should have an emergency fund (that is quickly accessible savings) which covers about 3 -6 months of your expenses. The exact amount depends on a number of factors like your job security, number of dependents, amount of high-interest debt, your age, etc.
If you have less than the preferred amount, you should plan for additional expenses to stock up.
5. Make the math: Are your current expenses less than your income?
If yes, great. If you have a considerable amount of money left each month, you should have a strategy for using it: paying off debts faster, stock up emergency funds or invest. BUT, since we are living in a special and slightly uncertain time, you should still continue and calculate through the next steps: It might save you some money by discovering unnecessary expenses (like the subscription you are not using anymore) or by checking for better offers (maybe there is a better phone plan available?) And thinking through different scenarios will give you peace of mind as you will be better prepared for making potential adjustments in the future.
If no, you have to reduce your expenses or get more income. Let's continue with the next steps to find some savings.
6. Group your expenses into needs and wants:
Needs: Those are all the essential costs you need for your living. Note that some of those costs might be irregular and to a certain degree adjustable: what and how you buy your groceries can have a remarkable impact on the costs.
Wants: Many of the irregular costs are wants or nice to have expenses: entertainment, clothes (at least part of it), electronics, gym memberships, travel, lawn care service etc)
7. Review and adjust the budget for your expenses:
Needs: Usually you cannot completely cross out expenses from this list. But you should check on each of those whether you could save money on it. It might even be possible to achieve saving without negative impacts on the outcome (for example by bundling insurances together) or with limited impact only (like adjusting grocery budget or downgrade the phone plan)
Wants: There is more choice here as we could live without those expenses. Yet we feel it is painful to reduce those things since they are the things we really want. So you have to prioritize whether there are some parts you can completely live without, or you want to partly cut down on more items.
Think of how much you could save by setting measurable goals like" I want to spend 30$ on my weekly grocery trip, every week"
8. Define the right amount to plan for the next months
Here comes the second set of data, the baseline months in the picture. By comparing the old "normal" values with the actual "extraordinary" values you can get to the right amount for the next months. For some expenses it will probably continue through the rest of the year with the current amount, some will get back to normal quicker. Think also how much your income likely will be during the next 6 months.
9. Put all together - do the math again
Put your revised numbers together and check the result again. If you still are on the overspending side, repeat the spending adjustment until you are on a good level. If there are no other means, consider adjusting or deferring loan repayment (during COVID19 many lenders offer possibilities), refinancing your home loan, or consolidate credit card debt into a balance transfer card. But keep in mind, that those last options are helping only a limited time!
10. Think through different scenarios
As you already have investigated in exploring your expense structure, it is useful thinking of one or possible change scenarios. The scenarios depend on your situation and on how you estimate the future. Some examples could be:
You lose your job and have to live from unemployment money for a few months. After this, your salary is smaller than before.
Your spouse is starting to work. This brings more income but changes the expenses also.
You move to another area and are also downsizing your home.
Create a budget makes the impact visible! By doing this you make yourself prepared for even worst-case scenarios and you can act faster should it become necessary.
This is all!
Does this sound complicated? It might be a bit overwhelming when doing it the first time, but it becomes easier by the time.
A Daily Money Manager can provide you help, either by helping you with a workshop during the first round, or on a ongoing base. Check Services for more details.
Self-study: Check Links for resources on personal finances.