The global pandemic has highlighted many things that are both wrong and right with the systems we use to run our governments and everyday lives. Closer to home, it is also calling attention to failings in standard budgeting practices and financial advice.
Here are three significant changes to financial planning and crisis preparation:
- Everyone should have two budgets. Your standard budget is the one you have designed to help you reach your current financial goal. This plan will assist you in paying off your debts, save up for essential purchases, or prepare for retirement. This is the budget designed to hold you to your goals while allowing you the flexibility not to feel completely caged.
But you should also lay out a “Bare Bones” budget, which cuts out any extraneous spending and focuses solely on the absolute essentials for survival. This budget should include your rent or mortgage, utilities, food, and health insurance. You may also want to make a note of the minimum payments for all outstanding debts. Leave out anything unnecessary, such as entertainment, new clothes, memberships, and eating out. The total expenses for this budget are the absolute minimum amount of money you need per month to make it through should things go south.
- Savings recommendations are not realistic. Most financial planning experts have long recommended a minimum emergency savings of $1,000 before starting a debt payoff plan. Once debts are paid down, you should circle back and ramp up your emergency funds to cover up to six months of essentials (or your Bare Bones budget).
However, many are discovering how far $1,000 doesn’t stretch. In most communities, that amount will hardly cover a single rent or mortgage payment. It certainly will not cover a month of expenses for furloughed workers waiting to receive temporary unemployment.
Reality has dictated that a “starter” emergency savings should cover a month of Bare Bones expenses at a minimum. While a six-month reserve is also a good midway point for those who have managed to clear out their debts, a healthy emergency fund should be able to cover essentials for up to a year.
- Have a crisis plan. No one wants to think about the worst happening. But planning for a future crisis is often an exercise in submitting to minor stress now to avoid a higher level of potential stress. An excellent financial crisis plan can help bridge gaps in employment and help buffer the household should there be a permanent loss of income. Items for consideration in your plan should include:
- Your Bare Bones budget.
- Steps to creating a robust emergency fund.
- Life insurance.
- A list of current debts and their contact information (for negotiation).
- A list of subscriptions and auto-pay programs. Include steps to canceling monthly payments or pausing renewals.
Our understanding of financial stability is changing as real-world events prove how some of our preconceptions have become outdated. These three updates are essential considerations for your future budgeting and crisis management plans.