In my previous post, I outlined sources of funds available to people experiencing income reduction or loss. This week, I'll talk about how to best manage those funds during these difficult times.
What resources are available to help you meet your expenses?
The first step is to identify what you own that can help you get by during this time. The balance sheet is tool we use to identify what you own (your assets) and what you owe (your debts). The difference between your assets and debt is your net worth. When constructing your balance sheet, you want to be mindful of what is most liquid, or what can most easily be converted to cash for spending to cover any shortfall between your income and expenses. On your balance sheet, you'll want to list your cash, investments, retirement accounts, real estate, and personal property--in that order. Record where the asset is held along with its current value.
On the debt side, make note of your term loans (mortgage, car loan, student debt, and personal or consolidation loans). You'll also want to know your revolving credit (credit cards and lines of credit). Record the name of the lender, the interest rate on the loan, and the repayment terms. Secured loans will often have a lower interest rate, because the lender can take your property as collateral if you're unable to pay your debt. Unsecured loans may be tempting to use to cover a shortfall in your cash flow, but the interest rate could put you in a dangerous spot.
Now that we've identified resources that can help you cover a shortfall in income, let's take a look at your expenses. And for that, we'll need to talk about the B-word. You'll need a budget.
The B-Word: Creating your budget
Budgets help us understand our expected inflows (income) and allot them toward our outflows, or expenses. And ideally, we want to be in a position where our inflows exceed those outflows. But that may not be the case if you're suddenly experiencing a loss or reduction to your income. In that case, we may need to rely on other sources of funds (savings or--as a last resort--debt) to fill the gap. Understanding this shortfall, knowing your options for covering that shortfall, and limiting unnecessary expenses, are all key to getting through this situation.
There are so many options for making a budget that you can really find what works best for you. Seriously, pen and paper work great. One of these free Excel templates could definitely do the job. You can also use a free tool like Mint that automatically keeps track of your expenses by allowing you to connect all of your accounts.
The point is, you need a place where you can make a plan for all the expenses you need to prioritize. We'll start with the essentials. As a human, there are things you need: shelter, food, clothing, and water. Okay, I'm not that spartan. You probably also need electricity, health insurance, a phone, and probably internet if you're reading this post. In this essentials category, I also include what you owe. You're expected to make regular payments on your debt, and there are consequences if you neglect to make those payments.
Then you've got discretionary expenses. These are expenses you can cut if you're tightening up cash flow. Subscriptions, entertainment, restaurants and bars, new clothes, beauty and wellness costs, hobbies, and event tickets all fall into this category. They make life nice, but they aren't essential.
The third category of expenses includes what you do for your financial wellbeing: saving for the future. Record contributions to retirement, health savings, savings accounts, college savings, and any other accounts where you set money aside.
Now, total up all your expenses: Essential, Discretionary, and Savings, and compare this amount to your expected income during this time. Do you have enough? Fantastic. Why are you reading this!? Do you have a shortfall where your expenses outpace your income? Read on, friend!
Prioritizing and Cutting Expenses
When looking at what to cut, I look first at discretionary spending, then essential expenses, then savings contributions.
Fortunately, the pandemic makes it easy to cut many discretionary expenses, since the purveyors of these goods and services are mostly closed and canceled. It's easy to cut travel, concerts, and restaurants from your budget during lockdown. You get to make decisions about how and when to cut these expenses. Maybe you cut Hulu but not Netflix. Maybe you limit your Amazon haul to one jigsaw puzzle at a time. It's your call, but it's also your first priority in cutting expenses.
Managing your essential expenses
Many people might see their mortgage or student loan payment as their highest monthly expense. I recommend calling your mortgage servicer or lender to request a hardship forbearance if you're unable to pay your mortgage. You should clarify your lender's policies regarding a hardship forbearance. You can expect interest to continue accruing during forbearance. Avoid a big balloon payment at the end of your forbearance by requesting the missed payments be added to the end of your loan term.
For those with federal student loans, the CARES Act provides payment suspension through September. Interest during the suspension period is set at 0%. If your loan is serviced by the Education Department, this suspension is automatic. Otherwise, you may need to contact your servicer to clarify how to suspend your payments. The CARES Act suspension applies to federal direct, FFEL, and consolidation loans. For folks with private student loans, you'll need to contact the servicer to find out about their forbearance options.
If you are unable to make your other loan payments, such as a car or personal loan, of if you're unable to make the minimum payments on credit cards, your best option is to contact each creditor to let them know your situation. Try to make a partial payment if you're able.
Although evictions are postponed for the time being, you should contact your landlord if you're unable to pay your rent. Let them know your situation and try to make some payment if you're able. Same thing with your bills. Look for ways to cut your energy use and contact your internet and/or cell phone provider to lower your monthly bill. Cancel services you're unable to afford or use.
To cut your grocery costs, make a list before you head to the store, and only buy items on the list. You may want to try meal planning to ensure you don't over-buy on the groceries. Dig deep into the pantry. Consider using coupons for things you'll actually eat. If you're unable to afford groceries, you should consider public resources available. In Texas, you can call 2-1-1 to find out about food pantry options and other services. To get help for groceries, health, and cash benefits for people with children, visit this site.
Changing Your Savings Strategy
This one is the toughest call, since it's hard to provide blanket advice about savings without knowing your overall plan. Contributions to your employer-provided plan or health savings account often made pre-tax, so changing these contributions may affect your 2020 tax bill. If your income has stopped, these contributions are typically turned off. Reduced income may also reduce your contribution to these accounts.
It's also challenging to recommend changes to your cash savings. Cash, in a period of limited income, is incredibly important in covering emergency expenses or shortfall. If you're able to save anything for emergencies, I recommend adding to cash savings with any excess cash flow. Although this situation is temporary, we don't know how long it will last, and cash can be immensely valuable in helping you weather this uncertainty.
If you have questions about your specific strategy to get through these times, contact me to set up a time to talk. I hope you're able to stay sane and healthy during this time.