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- As a financial planner, I've seen clients' income and expenses shift wildly due to COVID-19, and I've made four recommendations to keep budgets balanced.
- I first recommend making a COVID and non-COVID budget — estimate your income and expenses under both scenarios to better understand your cash flow. Determine whether you're in the red or the black.
- Then, I have some specific suggestions for how to use extra cash or cover a shortfall — in either case, it's important to have a plan.
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From layoffs, salary cuts, and missed bonuses to canceled travel plans, working out at home, and spending less at restaurants, almost every one of my clients has experienced budget changes due to COVID-19.
For some, it's meant going from having a surplus to focusing on making ends meet. And for others, it's meant socking away thousands of extra dollars each month. But no matter the situation, creating two versions of their budget — a COVID budget and a non-COVID budget — has enabled them to have a plan and be intentional in both scenarios. And in the coming months, we may very well need to switch back and forth a bit between the two versions as things continue to unfold.
Here's what I'm recommending to clients who are navigating budget changes due to COVID-19.
Make two versions of your budget
Look at each version side-by-side and focus on the items that are different between the two.
Start with income. Has your salary changed? Have bonuses been suspended for the year? Has business slowed down or picked up? Have you been laid off and replaced earned income with unemployment? Write down the amount of income you take home monthly in a typical non-COVID month versus during COVID as a starting point for the two versions of your budget.
After you clarify income changes, move to expenses. What expenses have changed? Do you have federal student loan payments that are currently on hold? For a lot of us, groceries and takeout might be higher, but travel, restaurants, gym memberships, and childcare might be lower.
I primarily work with professional couples with young families, and many of them are now sorting out how to add back in preschool and daycare for little ones, and private tutors, babysitters, or pod-school costs for elementary kiddos.
Many of them had extra cash flow in the spring and summer as daycare centers were largely closed, but now things are changing with the start of the school year. Some are considering switching to private school due to the pandemic, and some are leaving private school because of the pandemic. Either way, things are different.
Determine whether you're in the black or the red
Review your COVID budget and see whether you have extra dollars available at the end of the month, or whether your expenses are higher than your income. Although it can be scary to see that you're in the red, it's critical information to have so that you can make a plan for how to handle it with as little long-term impact to your overall finances as possible.
Make a plan for extra cash
If you find that you have extra cash in your COVID budget, maybe from not paying for childcare or spending less on travel, be intentional about capturing those dollars and putting them to good use.
If your emergency fund isn't fully stocked (at least three to six months of income), that's typically a great place to start. If you have plenty of cash already, consider using extra cash to pay down high-interest debt or perhaps to increase retirement savings.
And with mortgage rates hitting all-time lows, consider using some of that cash to cover closing costs on a potential mortgage refinance. If you're thinking about refinancing, talk to a mortgage broker or your financial planner to figure out whether it would make sense for you given your situation.
Make a plan for covering a shortfall
If you find that your expenses are higher than your income in your COVID budget, consider ways to increase income and decrease expenses.
To lower expenses, work with vendors (utilities, insurance, credit card companies, mortgage lenders) to access COVID assistance programs. Figure out where in your budget you can make temporary changes to reduce what you're spending. It's not forever — it's just for COVID.
You could also temporarily reduce, or stop, putting money towards your financial goals. You could consider reducing 401(k) savings and other savings, and stop making extra payments towards debt. Just be sure to do what you can to continue consistently making minimum payments on your debt to protect your credit score.
And if you're looking for ways to increase income, consider applying for unemployment benefits if you qualify, or looking for other side hustles or contract work you could do during this season. Again, it's not forever.
Lastly, if you do have a shortfall, figure out exactly how much it is each month and how long you can cover the shortfall with cash.
Although every situation is different, virtually all of us are experiencing budget changes due to COVID. So get it on paper and make a game plan for what to do right now and what to do when things get back to normal, whenever that will be!
Natalie Taylor, CFP, BFA, draws on 15 years of financial planning experience, seven years in fintech, and a decade of professional speaking to share advice that works in real life, not just on paper.
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