The health crisis that gripped the whole world opened up the discussion about having a crisis-proof budget. It’s because the pandemic did not only affect the health industry. The effects rippled out into the economy and as a result, personal finances were put to the extreme stress test. People suddenly found their employment status questionable.
This led to about 3.3 million Americans filing for unemployment early this year according to a Forbes report. The reason for this is that many companies were forced to drastically make cost-cutting measures to survive. Some businesses were even forced to completely shut down operations in light of the health crisis.
This is one of the biggest reasons why most Americans started to look into building a crisis-proof budget. The goal was simple – to help their finances withstand another crisis in the future. It is not easy to get caught unprepared and struggling to make ends meet. For some, spending on basic expenses was putting too much strain on their finances.
How to make a crisis-proof budget
Now that you have an idea of the importance of having an emergency fund, here are a few things to help you get started.
Know your current baseline income
Before you go all out in trying to strengthen your reserve budget, you need to make sure that you know your baseline income. Simply put, this is how much you are bringing into your finances every month. When you are making plans for your future, you always need baseline data. This is where you are at the moment. So why is it important?
The biggest reason is that it shows you the amount of work you need to put in to get to your goal. From where you are now to where you want to be. The part in the middle is what you need to work on. If you know how much your income is at present, it also helps you plan accordingly. You know how much you can set aside for your reserve funds.
Classify all expenses
It is not all about your income when putting together a crisis-proof budget. You also need to carefully go through your expenses as well. This means thoroughly reviewing and classifying them so you can make easier financial decisions. There are times when you need to cut down on costs to help you prioritize your expenses.
This is because when you begin to cut down on your costs, it is a lot easier to do them when you know your priorities. Look at discretionary expenses you make every month and see if you can cut down on them or strike them out altogether. The process is a lot faster when you have a list that prioritizes your household expenses.
Focus on essential purchases
When you want to create a crisis-proof budget, you need better control of how you spend your income. Classifying your expenses is one thing but actually following your list is another. You need to find a way to stick to your essential needs at the moment. This will give you the chance to preserve your income over a longer period of time.
Take your food for instance where it is an essential need but you might have a habit of ordering takeout. This increases your food budget and it might be better to simply cook your own meals at home. It might take some getting used to as you buy, prepare, and cook everything by yourself. But you not only save money, but you also make sure you are serving clean and healthy meals to your family.
Spend wisely to save more
A crisis-proof budget does not automatically mean you do not spend money altogether. It simply requires you to be more cautious about how you spend your income. It’s primarily because you could be running on limited resources. The goal is to make sure you have enough for all your essential needs at home.
But there is a way to actually spend wisely and save more in the process and it involves your credit card. You need to remember that your credit cards are just tools at your disposal. One thing you can do is assign a card for specific expenses. Think of the rewards that you get for it such as rebates or points and see how you can take advantage of it. You can end up with a big discount when you get all your rewards.
There are also instances when buying in bulk can get you an additional discount. But be careful because you could end up with more items than you need. And in the end, they could end up in the trash. One way to be smart about this is planning ahead. If you prepare your meals and you know you need one ingredient across several items you will prepare, buy them in bulk. If you buy a lot of things you don’t need, it costs you more in the end.
The benefit of having a crisis-proof budget
Now that you have an idea of how to create a budget that can withstand a crisis, here are a few more reasons to do it. There are a lot more benefits to taking control of your budget other than preparing for a crisis.
Have financial control
Having this budget gives you a better grip on your finances. The more control you have over your finances, the better you can control your journey to your goals. You can plan better for your retirement, paying down your house, or even getting started on that business you want to put up. The bottom line is that you get to take the lead and pursue your goals in life.
Ability to stay away from more debts
A crisis-proof budget gives you the ability to stay away from debt as well. If you think about it, getting into any financial emergencies without a reserve fund to tap into leads to debt. It’s because you would begin to use whatever you have available to get through your problem. This usually means using credit, other savings accounts, and even taking out a loan.
You might not have an emergency fund to tap into when you need it and this puts other accounts in peril. It can be your retirement fund or even a college fund for your children. You could be forced to use these to cover and pay for your financial needs. Credit cards are also a go-to option for people strapped for cash in emergency situations.
The problem gets worse once you begin to take out loans to cover your needs. When you need one fast, you usually end up with high-interest loans like a payday loan. You get the money you need but you have to pay back a huge amount of money in the next few months. This is one of the reasons why you need to be more proactive in putting your budget together. Especially as CNBC explains that about 18% of adults with $50,000 or less do not have any savings at all.
It is crucial that you start thinking about a crisis-proof budget to help you overcome future economic challenges. The health crisis is still tearing up the whole world but a lot of economies are starting to bounce back. Businesses are starting to open and employees are being called back to work. Take advantage of it by preparing your finances for the changes to come.