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Reset After a Financial Setback

By Kate Rockwood | April 20, 2020 | Rally Health

Do you track where your money goes? Four out of five people have some type of budget in place for their families, according to a 2020 survey from Debt.com. But financial changes due to COVID-19, including job losses, furloughs, lost wages, and market swings, may make it necessary to re-evaluate. And if you’re among the 20 percent without a budget, mapping out a spending plan now may help you ride out current financial conditions. 

“We’re finding that people who engage in the budgeting process during crisis time are better able to pare back to what’s important in their lives,” says Katie Waters, certified financial planner and founder of Stable Waters Financial.

She reminds budget-resistant people that the process doesn’t have to be painful or complicated. And having some sort of plan in place can bring its own sense of empowerment. Brian O’Connor, author of The $1,000 Challenge, points out, “you can’t control how many people in your town are going to get sick or whether your company or employer goes broke. But your budget is something you can control.”

Whether you’re a budgeting pro or just getting started, follow these five steps to re-evaluate your finances and stay afloat during these uncertain times.

Step 1: Face the figures

Should you slash spending by 10 percent? Can you afford to put more into your savings? There’s no way to set money goals for the future without first knowing where you are. And, yes, that means taking a look at how you’ve been spending your money the past few months.

Waters recommends printing out your bank or credit card statements, then grabbing a highlighter to categorize every single expense. At a minimum, you want to break things into fixed needs (rent, insurance, car payment), flexible needs (groceries, utilities) and wants (entertainment, clothes, pretty much everything else). Finding the average from three months’ worth of spending will give you an accurate starting point, she says.

Step 2: Know your must-have number

In an ideal world, you’d have endless pockets of cash to cover all sorts of goals, both future (retirement!) and fanciful (hot tub!). But in the here and now, it’s helpful to get a sense of how much you need each month to cover your absolute basics, like housing, groceries, utilities, and transportation, says Waters.

After you’ve totalled your must-have number, figure out if your current income will cover it. If so, you can start allocating extra funds for long-term goals and savings. If not, you’ll have a sense of how much help you’ll need to cover the shortfall. Depending on your situation, that might mean filing for unemployment, dipping into savings, refinancing a mortgage or car loan, or requesting deferred payments from some of your lenders. From stimulus checks to small business support, federal programs can also help. “We’re seeing federal programs that are just unprecedented,” Waters says. “Really utilize what you might qualify for to help reduce monthly expenses.” 

Step 3: Find your method

For some, the word “budget” is synonymous with color-coded spreadsheets and tracking every purchase down to the penny. But the truth is there are many methods for tracking spending, from divvying up cash into separate envelopes, to mobile apps that sync with your bank and credit card accounts, to tallying columns in a notebook, says Elaine King, a certified financial planner and founder of Family and Money Matters. The Consumer Financial Protection Bureau even offers a handy spreadsheet for tracking spending. No one system reigns supreme. Instead, you want to pick one that feels intuitive and straightforward so you’ll stick with it, she says.

For a relatively hands-off approach, Waters suggests setting up two separate checking accounts: one for bills, and one for discretionary spending. Keeping an eye on the discretionary balance can help guide your spending decisions, without worrying that you’re going to accidentally eat into the rent money. O’Connor takes a similar approach, taking out a set amount of cash each week as an adult allowance. Both methods make sure you don’t overspend without making you track every individual expense.

“Budgeting can be a bit of work up front, but if you find the right system you can set it and forget it,” Waters says.

Step 4: Prioritize savings

It might seem counterintuitive to prioritize savings during a difficult financial time, but it’s hard to know how the next weeks or months might unfold, says King. And socking away even a little bit now might make a real difference down the road. (Keep in mind that 12 percent of Americans are unable to access $400 in an emergency.)

Here’s a weird reality that financial experts witness time and again: If you map out all of your spending first and then put whatever’s leftover into a savings account, you’ll wind up saving way less than if you earmark savings first and then stretch whatever’s leftover to cover your expenses. Particularly during the pandemic, prioritize saving over everyday wants, like entertainment or food delivery. “You don’t have to beat yourself up over every $6 sandwich,” says O’Connor. But focus on the big picture: building your savings so you have greater security.

Step 5: Think marathon, not sprint

It’s impossible to know right now how long the COVID-19 situation will last. While it’s important to remember that it will one day be over, it’s not financially healthy to treat it as a fleeting problem. 

“When people go into temporary survival mode, they spend because it gives them relief, but that puts them in a worse position down the line,” Waters says. Instead, she encourages people to make a budget they can live on for the foreseeable future — even stretching a year or more into the future. 

That said, don’t think you have to reset your budget overnight. If you aren’t in a dire situation, focus on taking baby steps, King says. Maybe this month, focus on curbing your online shopping habits (no. more. puzzles). Next month, nudge your savings a bit higher.

And, of course, it’s important to give yourself grace — especially during so much uncertainty. The reality is that you can’t fully anticipate every possible expense, says O’Connor. “Be as consistent as you can, but be kind to yourself.”

Note to our readers: This information is being made available as a free resource to the public. It is not an endorsement of any of the Finance-Related Resources listed in this article — financial consultants, planners, services, organizations/associations, websites, tools, lenders, credit unions, or banks. None of the Finance-Related Resources listed have solicited Rally Health to be included, and Rally Health receives no compensation from the Finance Resources mentioned in this article.

Kate Rockwood
Rally Health