Navigating your way through a crisis like COVID-19 starts with financial planning. While this pandemic is unique to our global economy, tried and true behaviors can help your finances from taking a drastic hit.
Establish an Emergency Savings Fund
Having an emergency fund to cover expenses in the event of a loss of income has never been more important than times like these. How much you need to have saved depends on your mostly on your lifestyle. In general, it is recommended to try to save at least three to six months of expenses for use during an emergency. If you don’t have one established, consider opening a separate bank account for this fund and set up automatic deposits to help build its value.
Create a Budget
Most people approach the idea of budgeting with dread, because it can feel like saying no to the things you want. The truth is that a budget is really just a spending plan for your money. When you create your budget, you decide in advance what you want to do and where your money goes. One method that has benefited others is to divide spending into three primary categories:
- Essentials - Income devoted towards expenses you must pay such as mortgage or rent, utilities, insurance, taxes, transportation, food, etc.
- Financial priorities - Income devoted towards planning for the future such as building your emergency fund or contributing towards your retirement plan.
- Lifestyle choices - Income left for the extras that help you live more comfortably and perhaps more enjoyable, but are not essential such as shopping, memberships, entertainment and more.
Knowing how much you need to survive can help eliminate panic down the road, because you will better understand how long your savings, stimulus or financial assistance can last. During a crisis, consider eliminating any non-essential spending and find ways to save on essentials as well.
Adjust Your Lifestyle
Once your budget is established, immediately adjust your lifestyle. Under normal circumstances, it can take time and practice to properly develop a budget and implement it. Today, this diligence will be key to ensuring that COVID-19 is a minor blip on your personal finances instead of a life-altering crisis. When evaluating your three budget categories, consider how you can adjust lifestyle choices to contribute more towards essentials or financial priorities. If the expense doesn’t involve things like food, shelter and transportation, determine if you can eliminate it right now.
Rebuild Your Savings
Once the dust settles, it can be tempting to immediately fall back into former routines, including spending habits. Now, more than ever, it will be important to stick to the budget you developed to get through COVID-19. You may have drawn from your emergency savings during that time so it is crucial to work on rebuilding before spending on anything extra. No one’s financial situation is guaranteed so taking this extra precaution can help you prepare for any future unforeseen circumstances.
Published on September 11, 2020