The Importance of Creating a Strong Household Budget for Times of Crisis
The COVID-19 pandemic has created a rough situation for everyone. As the disease sweeps across the globe, everyone’s top priority right now remains the same – staying healthy. However, staying physically and financially healthy in the current economic climate poses a challenge for most people. Here are 5 tips about budgeting during COVID-19
With companies closing their doors comes a spike in the unemployment rate. The unemployment rate in the US has jumped to a staggering 13.3 percent – worse than any previous recession since World War II.
Almost half of all Americans live paycheck to paycheck, and this was before the pandemic hit. The rise of COVID-19 means that people who have little in the way of savings feel an extra pinch in their finances. As financial uncertainty and record unemployment rates persist, more Americans will suffer the strain in their finances.
The federal government tried to help with an economic stimulus package designed to give cash to citizens. However, this obviously cannot serve as a viable long-term solution. If you feel the financial pinch because of the current pandemic, then it helps to set up an emergency budget.
To stay afloat during a crisis means, you will need to cut back or eliminate certain expenses. It helps to review and revise your budget to make it past the effects of the pandemic. Here are five steps you can follow to help manage your budget as we ride out the crisis and wait for normalcy to return.
Take Stock of Your Assets and Income
You need to look at two things when building your budget: your earnings and expenses. The coronavirus has caused many people’s incomes to take a substantial hit. You can’t continue to budget the same way you did before the pandemic hit.
To start, check your income, especially if your household has experienced a layoff or a cut in working hours. This should give you an idea of how much you will need to cut from your budget. Take note that if you were already living above your means before the coronavirus hit, then you may have to make more drastic cuts to your budget.
The next step involves closely examining your income, including your benefits. This includes unemployment benefits from the state and the federal stimulus package. Free-lance workers and self-employed individuals can receive unemployment benefits under the stimulus package.
Next, look at your savings. Ideally, you should have enough to tide you over for up to six months of expenses. But don’t panic if you don’t have a lot of cash saved up. Calculate whatever savings you have and use this to help cover your expenses.
Understand Your Expenses
Make a list of everything you spend money on every month. Start the list with your fixed expenses. These include everything you need to support a basic standard of living, such as housing costs, food, utilities, insurance, and debt payments.
Next comes your variable expenses. These expenses can change over the course of a week or month. Variable costs may include clothing, fuel, recreational expenses, personal care, and entertainment.
Putting your expenses in specific categories can help you determine which to prioritize and which to cut out.
Review Your Essential Spending
After trimming off most of the fat from your budget, it’s time to review your essential expenses.
Start with your housing expenses. Do you own your own home? If you so, the federal stimulus package includes help for federally backed mortgage loans. Reach out to your lender, especially if you have an outstanding mortgage and you don’t want to fall behind on payments. Most creditors will help you explore any options to suspend or reduce loan payments temporarily.
Consider refinancing your home loan. Mortgage loan rates remain at all-time historically low rates right now, and refinancing your mortgage could help lower housing costs. Keep in mind that refinancing your mortgage may require closing costs unless you prefer a no-closing cost home mortgage refinance.
Low-interest rates could make a home equity loan (HEL) or a home equity line of credit (HELOC) attractive options but approach such credit lines cautiously. Your home’s value could dip if a recession hits because of the coronavirus.
Renters may have fewer options in managing rent payments. Many cities and states offer a degree of short-term protection by imposing moratoriums on eviction.
Many utility companies have also suspended disconnections for non-payment of bills. This means you won’t lose service if you can’t pay your bills, but make sure to catch up with your payments later.
You should also look into making your debt load easier to manage. The stimulus package includes relief for federal student loans, but it doesn’t apply to private student loans. For private loans, contact your loan provider and check into the possibility of a deferment.
You also need to properly manage your credit card debt. Stay in touch with your credit card issuers. Credit card companies often have programs that let you lower your payments. They can also offer a temporary reduction in your interest rate.
Spend Smart
Even the strictest budgeting won’t prevent you from spending money completely; you just have to spend your money wisely.
For example, use vouchers to save while shopping and take advantage of cash-back apps. Cash back apps and programs pay you back a percentage of the money you spend. Additionally, cash-back credit cards let you double up on rewards. However, be careful when using credit cards that you do not overspend, especially when money is tight.
Take advantage of sales and buy food and other necessities in bulk. Buying in bulk is often cheaper and more affordable and saves you multiple trips to the grocery to buy food and other needs.
The Bottom Line
With the right budget and the right mindset, you can stay afloat financially during the coronavirus COVID-19 pandemic. Things may get tighter when your budget changes drastically, but don’t panic. Take things in stride, consider your available options, and get to work on a new streamlined budget.
