What's New With Budgeting (2020)
Budgeting during a Pandemic
The financial experience of Americans over the last six months has fallen one of two ways. If one was able to continue to work from home without losing income, and without giving up a job to take over childcare, they likely saw savings increase or debt decrease as spending was reallocated, but in all likelihood, dropped overall. Then there was everyone else. According to one survey, about half of Americans reported a drop in income, and almost 20% are using savings to make ends meet. We first digest the advice offered over the last few months for those suffering a loss in income, either temporary or permanent.
A behavioral scientist from Duke University, Mariel Beasley, had a few suggestions for dealing with cash shortfalls. She works at Duke’s Common Cents Lab, a behavior science lab focused on the financial well-being of low income people. Her first suggestion is to mentally account for your spending, starting with monthly expenses like rent, then the necessary but more variable expenses like food, and finally, what you do with the rest (if any), like emergency savings. This is not unlike a traditional approach to budgeting, but more important when cash is tight to highlight the opportunity cost of spending. The next suggestion was to break down monthly allocations for things like food to how much you can spend per week, or per trip to the grocery store, to keep better control over the total spending. Finally, she suggests you plan ahead. Don’t wait until the cash runs out to figure out where to go for help with food (when and how to apply for food assistance like SNAP), rent/mortgage payments (agencies to get help, or a Plan B—where could you move if you had to?), and work out a deal with your credit card companies and other creditors. (CNBC)
Data suggest that many young adults (18-29) moved back in with parents during the pandemic. In addition to saving on living expenses when/if income dropped, moving home may also have helped with their mental health by being part of a larger quarantine bubble.
An article in US News and World Report basically suggested we allow ourselves to put aside these 7 common personal finance rules during the pandemic:
1. Always pay your bills on time. (Work with each creditor on a new payment plan.)
2. Maximize retirement contributions. (Put that money in an emergency fund instead during the pandemic.)
3. Keep your credit utilization low. (If you must run up your credit card balances, work to reduce them ASAP once your income returns and the ding to your credit score will eventually reverse itself.)
4. Pay double or triple the minimum due on your credit card. (Obviously not happening…see #1 and #3.)
5. Pay off student loans quickly. (If you have Federal loans, take advantage of the mandated freeze through December 31. If you have private loans, see if you can work with your loan servicer.)
6. Never touch your retirement fund. (Sadly, this may be the only option for some. However, if you borrow up to $100,000 from a 401k and repay it within three years, there is no tax on the amount borrowed.)
7. Shop with cash to avoid impulse purchases. (Cash is not flowing during the pandemic for fear of spreading germs and because everything is being ordered and paid for digitally. Instead of relying on cash when things get tight, remove all saved credit/debit card information from your favorite sites. This would be the digital equivalent of physically freezing your credit cards.
A survey from DepositAccounts revealed that 8 out of 10 Americans shifted their financial focus during the pandemic to paying down debt and bolstering emergency funds. The key findings are quoted below. (PRNewsWire) The last three are music to a financial educator's ears.
- Of those surveyed, 82% said the coronavirus pandemic has changed their financial priorities in some way, including becoming more focused on paying down debt (36%) and building an emergency fund (33%).
- When asked what their number one financial priority is right now, consumers said paying off debt (25%), paying monthly bills (19%) and building an emergency fund (14%).
- The survey revealed that financial priorities vary by age group. Gen Z is most focused on finding a better job (31%), while millennials and Gen X are putting their energy toward paying off debt (25% and 28%, respectively).
- There were also differences in financial priorities between men and women. Men said their top financial priority is paying off debt (29% versus 22% of women), while women are primarily focused on paying their monthly bills (30% versus 8% of men).
- Nearly a third (32%) of consumers said they're tracking their spending more often as a result of the coronavirus pandemic. Additionally, 28% are better at sticking to their budget and 24% are saving more money.
- About 45% of consumers are checking their bank account more frequently than they did prior to the pandemic, mainly to see if their relief check or unemployment benefits were deposited or to track their spending.
- Consumers have learned a number of money lessons from the crisis. The top three most important lessons consumers said they've learned are the necessity of having an emergency fund (28%), the importance of paying off debt during the good times (19%) and the fact that no industry or role is immune to layoffs (19%).
The data from that survey is consistent with the data illustrated by the Economist recently on how Americans spend their stimulus checks.
There were a few articles discussing budgeting strategies worth mentioning. In a Business Insider article, the author discusses her parents’ successful budgeting strategy. Basically, they wrote down absolutely every expenditure during the year, no matter how small, and based their budget for the following year on that pattern (taking total spending by category and dividing by 12). Savings were always a priority including retirement savings and maximizing any match. They often used only cash to better keep to the budget, and knew exactly what needed to be cut out of their spending to fund any additional savings goals. They lived a financially disciplined and frugal life, but were able to put three kids through college and retire in relative comfort.
While a CNBC story focuses on debt reduction strategies for those with subprime credit scores (580-669 FICO scores), the point is made that this work needs to be done for those in this situation BEFORE building a budget, so that debt reduction is an integral part of that budget.
Finally, this last article may be relevant for more people during than pandemic than normal. Budgeting when your income is variable may be different from the normal budget building guidelines, but no less important (see Forbes for a short and sweet guide to building a budget). Instead of working from expenses, a good place to start is to keep track of income over a longer period of time, like a year. What did you really make? How variable was it? Look to diversify your income sources to smooth out the income stream. You still need to look at fixed versus variable expenses and prioritize them, set short-, medium- and long-term goals. Setting aside savings, or paying yourself first, is critical to getting through the lower income stretches. (Nairametrics)
About the Author
Beth Tallman entered the working world armed with an M.B.A. in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducting student workshops, and developing finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.
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