Is your job secure? Recent unemployment numbers indicate that the job market is still rocky. Many of us are still at risk of either losing our jobs or being unable to find a new job. Take a moment to think about your situation: Do you consider your job to be “recession proof”? Or maybe you think it’s just a matter of time before they have you in that big conference room, discussing your severance package and ushering you out the door.
We are all susceptible to a sudden change in job status or income level and we should all know how this change will impact our finances. What would your finances look like if your household income or savings were eliminated or significantly reduced? Would you continue spending as if nothing new has occurred? Or would you figure out how much you have to live on and how you can sustain your household until your situation improves?
You need to make sure that if you suffer a loss or a negative event, that you understand your new cash flow. How much money is coming in after the event? How much do you have in savings? What is your financial plan? Maybe you can’t control your income at that moment, but you can control your expenses. This is when you turn to a crisis budget.
What is a crisis budget? It is simply a bare bones budget that cuts out the wants and focuses on the needs so that you can minimize your expenses until you find a new, steady flow of income.
How do you create a crisis budget? Take a look at your expenses from the past couple of months. Where is your money going? Be detailed and brutal in your review and categorize expenses as need or as wants. The wants get cut out of your budget. It’s that simple. Which expenses are truly “needs” that must stay in the budget will be different for everyone. But you need to be honest with yourself about what you truly need to keep in your budget.
What can I cut out? There are some common wants that I see on a regular basis. You may groan when you look at the list but you should think long and hard about whether it’s worth spending down your savings or racking up large credit card bills to maintain your lifestyle. It won’t make sense for all people to eliminate all of these things but you have to think long and hard about whether you need these expenses. This list is not exhaustive but it can get you started thinking about what stays and what goes.
- Cable TV. Anyone who read my previous post on cable television knows how I feel about all those channels. It’s not a necessity. Period.
- Housekeeping. This is a luxury. It’s nice to have but it’s not a necessity.
- Smart phone data plans. It may be difficult to reduce your plan if you have a phone that requires a data plan so this may not work for you. Also, you may need your blackberry or iPhone for your job search or other professional reasons. But if you just like being able to check Facebook when you’re at the grocery store, you don’t need this expense.
- Gym membership (if you’re not using it). If you can afford it and you use the gym regularly, this may be something you want to keep. But many of us have maintained a gym membership in the hopes that maybe one day we might go. I’m definitely guilty of this. If you don’t use it, get rid of it.
- Eating out. There’s very little to say about this. Learn to cook and learn to love your grocery store.
- Taxis. If it’s late at night and a taxi is the safe way to get home, I would not recommend walking or taking public transportation. But if you’re hailing taxis multiple times a week because you’re running late or you’re tired or you don’t want to wait for the train, you do not have an excuse to hop in a taxi.
- Nails and Hair. Learn to do these things yourself. Trust me. You can do it.
How long do I use a crisis budget? A crisis budget is not meant to be permanent. As the name implies, it’s meant to be used when a crisis impacts your financial life. It’s unlikely that your crisis budget is going to be sustainable in the long run. The expectation is not that you would spend the rest of your life living with a bare bones budget. Understand that you will make these cuts until your situation improves.
My kids will know something’s wrong if I start buying generic products and cut out their cable TV. I can’t do that to them! You are not helping your children by living beyond your means. You can teach your children a lot by showing them how to responsibly manage finances in a crisis. You know you’re children best but don’t assume that they will crumble if they find out that you are having trouble. Children are very perceptive and probably know something is wrong. Take charge of the situation. Don’t hide your changed financial circumstances from your children. Explain the situation to them and let them understand that you are working toward fixing the problem but that things may have to change for a little bit. Turn your crisis into a lesson on money management.
You can’t always avoid tragedy and crisis. You can do everything right and still end up in an unfortunate situation. But you CAN control how you react to the crisis. You can be prepared when problems strike. Take a look at your budget today so that you can increase your peace of mind down the road.
Kimberly Allman, Esq. is a financial planner and the President of Allman Financial Planning, LLC where she assists individuals who are seeking to improve their financial health. She is also the Manager of Homeownership Preservation for the New York Mortgage Coalition where she provides assistance to homeowners in distress through seminars, informational workshops and one-on-one counseling. She started her career as a corporate lawyer where she advised clients on a variety of investment products including hedge funds, mutual funds, structured products and real estate investment trusts.
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