We’ve talked before about creating emergency funds and plans so that you’re prepared to handle any kind of emergency that might happen. But what you also need is a slimmed down version of your budget that will operate as your new spending guide during emergencies. Lean budgets are there to help us during times of partial or total loss of income. They help us have more runway with our cash so that we can still pay for necessities during a crisis.
Whether you’re making a lean budget now so you’re prepared for a future emergency, or you’re in the midst of one (like a pandemic) already, the steps are the same. Here’s how you can create your lean budget.
Tip: If you’re already in the midst of an emergency due to job loss, or something else, check out Goodbudget 911: Crash Course, to see more detailed steps on surviving, adapting and thriving through a financial emergency.
1. Figure out how much income you’ll bring in
Everyone’s emergency will be different. Whether it’s due to job loss, a medical emergency, or even a pandemic forcing you to stay home, you may suddenly experience a partial or total loss of your income. First, know that there are things you can do to help fill the income gap, like file for unemployment benefits or pick up a temporary gig in the service industry (think grocery store clerk or delivery driver). But, if your income has changed, you’ll need to figure out as best you can how much you’ll be bringing in each month so you can create a lean budget that is equal to or less than that amount.
Once you have that number in mind, move to the next step.
2. Remove nonessential spending from your existing budget
To start, take a look at your existing budget. Like most of us, you probably have a few Fun categories that allow you to eat out, spend on clothes, or go on outings to the theater. But, during an emergency situation, that kind of spending isn’t essential and should be removed from your budget. By removing it, you’ll have a bit more runway in your budget to buy groceries and pay bills.
On top of removing things like eating out, you can also consider halting saving for things like vacation or your other money goals. Instead, you’ll divert that cash to more urgent spending throughout the emergency.
In a nutshell, consider removing nonessential spending (date nights, subscription services, Christmas gifts, childcare if you can do without it), pausing savings (emergency funds, retirement, college, other goals), and reducing giving (donations, tithes) so that you can use that money somewhere else.
3. Update essential spending
Once you’ve removed nonessential spending from your budget, you’ll want to spend some time reflecting on how your essential spending might change. If you’ve been ordered to stay home, you’ll probably need less gas money. However, that might also mean you’ll need more grocery money to support making more home cooked meals. So go ahead and adjust those categories so that they make sense for your current situation. Other essential spending categories that you might consider updating are: rent/mortgage, utilities bills, childcare, debt payments, medical fees, personal care, and cleaning products.
The coronavirus pandemic and resulting distancing orders have forced people to stay home and interrupted the normal flows of business, affecting families and businesses alike.If you’ve been financially impacted by the pandemic, there are some options you can consider to help pad the blow. And, in the area of essential spending, some folks may be eligible to have their rent postponed; others might be able to have their mortgage or student loan payments reduced or postponed. Taking advantage of options like these can help to free up money to spend on other essentials.
Once you’ve made those adjustments to your essential spending, double-check that your new lean budget is equal to or less than your estimated income from step 1. If your lean budget is still more than your income, that’s when you lean on your emergency fund or any savings you might have. If not, it’s time to get creative — ask friends and family for help or try to pick up temporary gig work to supplement your income.
4. Figure out how long your emergency fund will last you, and how you’ll get to it.
At this point, your lean budget is basically done. But, if you do have an emergency fund, now is the time to figure out how you’ll use it. Note how much you have so you can know how many months’ worth of lean expenses it will cover. To figure that out, start by finding out the difference between your estimated monthly income and your new lean budget. That’s how much you’ll need to pull from your emergency fund each month. When you divide your total emergency fund by how much you’ll use each month, you’ll know how many months of lean expenses you can cover.
Also, make a plan for when and how you’ll access the emergency fund so it’s readily available when you need it. For example, if your emergency fund is in a savings account, decide now if you’ll pull all the money you think you’ll need out up front, or if you’ll pull money from the emergency fund each month as you need it. Deciding early will save some headache later.
5. Reallocate money from goals and savings so you can use that during the emergency
If your emergency fund runs out (or you don’t have one), this is where you’ll need to tap into other savings. For example, if you’ve been saving up for a family vacation, you could consider moving some or all of that money into your depleted emergency fund. With that in mind, be sure to also create a plan for how you’ll pay that vacation fund back once you’re out of the emergency.
With these things in mind, you’ll have a lean budget that will help guide your spending during any emergency.