I’m worried about my friends who work in the service industry. My good friend Will runs a pizzeria and let go of his staff this week. My neighbor was just let go of her bartending job. I’m hoping federal aid will bring in income to everyone’s budgets, but still, 80% of Americans don’t know how much money they spend. Budgeting becomes even more important in times of economic distress.
Almost exactly a year ago, I wrote a blog post on how to create a 10-minute budget. It’s worth revisiting now that we’re in a time of tremendous economic uncertainty. I’ll lay out the four buckets and then explain how it might help when things are really bad.
FOUR BUCKETS
Pay Yourself First - What’s your savings rate? Budget for that first. Tip for bad asses: Direct deposit your wages/income into your investment account first, and withdraw enough money from that for your consumption expenses.
Needs - Housing, food, transportation, health care. This is your minimum monthly consumption you need to survive. In other words, this is your “squeak-by” budget; if things go really bad for you, this is the minimum amount you and your family need per month to live. Are there ways to reduce the amount you spend here? Guideline: if needs are over 50% of your budget, you’re probably living in financial fragility.
Wants - Stuff that brings enjoyment and pleasure into your life. Dining, travel, lattes. The key to your wants budget: you can have whatever you want, but you can’t have it all. Create a budget for your desires and realize it’s impossible and emotionally immature to get all your desires. CHOOSE which desires you want to satiate, which ones make you most happy. You can choose 20 $5 lattes or one $100 splurge dinner. They are literally the same thing and money doesn’t care, so do small, frequent purchases make you happier, or large, occasional purchases? Buying everything is mindless and makes everything you get less important. This becomes an exercise in mindfulness: what you choose intentionally, you get to savor. Remember, what you spend here reduces your savings rate, meaning more time away from financial freedom. But don’t make it so hard that you give up on your long-term financial goals. Balance the present and the future. Guideline: a “wants budget” should be no more than 30% of your monthly budget. For more motivation on reducing your wants, read this article about how capitalism get us to use purchasing to cover up our real problems (i.e. what’s the REAL problem?).
Bullshit - Money you’re spending that gives you no actual enjoyment in relation to the money spent on it. Money that you’re thoughtlessly throwing away. Alcohol, magazine subscriptions, gyms, and services you don’t use. Things you buy on Amazon because you desired them for a day and then used a couple of times. Again, an exercise in mindful spending: is this purchase going to make you happy, compared to the amount of hours you spent earning it? A colossal waste. You need to get rid of these. A partial list here.
GOING DEEPER: The “cash envelope system” is a system that helps people stick to their budgets.
After this, you make a yearly budget, which includes things you didn’t think of: emergencies, vacations, etc. Then you go back and pro-rate that into your monthly budget.
BUDGETING IN THE TIME OF CORONAVIRUS
The great thing about the 10-minute budget is that it’s a framework that works in both good times and bad times.
If you get laid off or are unemployed, knowing what your Needs are is a critical number. This is the number you HAVE to spend each month to survive. If you’re not making your Needs budget, you have to either borrow money from your future self (i.e. dip into your Savings) or someone else (preferably not the credit card company).
Let’s say you are still bringing in income, but not like before (for example, you run a business and things are much slower). If you can at least meet your Needs budget, you lower your savings rate and lower your Wants budget. Presumably you’ve zeroed out your Bullshit already. When things get good again, you try to make up the deferred payments into your savings and slowly expand your Wants budget.
The Oregonian has tips on how to manage debt when things are tighter than normal.
As mentioned in the previous post, in budgeting, be pessimistic, not optimistic. As we’re seeing right now, things seldom work out the way they should. The more conservative you are about your assumptions, the more leeway you have if something goes wrong (job loss, business failure, stock market crash, ill parents, i.e. like right now).
Think it sounds simple, but doubt you can execute this? I did another blog post on how to simplify your finances.
In times like this, it’s easy to forget what good there is in our lives. So try to spend a few minutes each day reminding yourself of what you’re grateful for. “Sometimes I go about pitying myself, and all the while, a great wind carries me across the sky.” — Ojibwe saying
Take care of yourselves, everyone. And take care of those around you.