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7 Efficient Budgeting Strategies During Coronavirus
As our nation slowly begins to reopen businesses and other services and with an extremely uncertain future ahead of all of us, many people are struggling to figure out what to do with the money they have, how to use it most effectively, and how to plan ahead for the months to come.
Will we see further waves of illness? Will some areas stay under stay-at-home orders throughout the summer? Will some orders return in the fall? Will things return completely to normal? Will there be a new modified form of “normal” for everyone? And what will that all mean for the economic future?
The truth is, we don’t know the answers to these questions. No one does.
Even in the face of that level of uncertainty, however, we can make some smart choices when it comes to budgeting our money going forward.
Seven smart money management strategies to use right now
1. Boost your emergency fund.
No matter what happens with coronavirus, we are absolutely headed into a deep recession and a period of economic uncertainty. Many smaller businesses (and some larger ones) will fail, many people will see reduced working hours, and many people may yet lose their jobs.
If you have steady work and clearly see a period like this on the horizon, the smartest move you can make is to bolster your emergency fund as much as possible.
There are a couple of big reasons for that. One, these adverse economic conditions may end up directly affecting you, in the form of a sudden job loss, a sudden cut in hours, or a cut in wages. Two, the enhanced risk of those types of emergencies mean that they’re more likely to stack up with other emergencies, like an illness or a car breakdown, creating an economic catastrophe.
So, how do you bolster an emergency fund – or start one if you don’t have one?
If you already have an emergency fund, I suggest immediately adding some money to it and accounting for that in your monthly budget. I also recommend setting up an automatic weekly transfer from your checking to your savings for a small amount, $10 or $20 or whatever you can afford. This causes your emergency fund to slowly build up over time during normal periods so that you have a nice healthy emergency fund during periods when things are difficult.
If you don’t have an emergency fund, I recommend following the strategies laid out in our guide on how to start building an emergency fund. In a nutshell:
- Open a savings account at a local bank or credit union, preferably one that’s different than your primary one. You can sign up online.
- Deposit some initial money into that account.
- Set up an automatic weekly transfer from your checking account to this new emergency fund savings account for a small amount – $10 or $20 or $50, whatever you can easily afford.
- Keep only a small amount of cash at home for an emergency fund, and don’t rely on credit cards for emergencies.
2. Consider carefully which activities and services you want to pick up again (and thus to budget for).
One of the most useful questions to ponder right now is what parts of normal are worth returning to? As things begin to open up again in some areas, which services and businesses are actually worth returning to as a customer, and which ones aren’t?
Over the last few months, many of us have had a lot of time at home without access to many of our favorite businesses and services, and that has provided some powerful time for reflection and consideration of what things really matter to us and what things do not. Our old daily routines were shattered, and for most of us, there were good things about that and bad things about that.
The bad, of course, is that we lost some things we really valued. Those things vary for everyone, but many of us miss social gatherings and a few of the treats that really made life sparkle for us.
At the same time, many of us lost things we didn’t really value at all and barely remember and don’t really miss. These were the old, tired parts of our routine, the things we kept doing out of habit without really thinking about it and without considering if there was a better way of doing things. Things like stops at fast food restaurants, stops at convenience stores and shopping excursions where we just bought more of what we already had or things we really didn’t need — those things are best left forgotten.
One good way to approach this matter is to pull out some of your old bank and credit card statements from January and February and look for purchases you made that you don’t remember at all, purchases that leave you feeling very little one way or another, purchases that you remember vaguely enjoying in the moment but leave you feeling nothing now, and purchases that make you feel a little cringe-y. Those are things you should drop from your life going forward. Those are the routines you shouldn’t return to, because they brought no lasting value to your life.
You shouldn’t cut out the things that make you feel good and leave you feeling excited when you review them. Leave those alone — those are good routines to return to.
It’s OK to be surprised by this exercise. We often have routines that we used to really love but then gradually fall out of love with, yet we keep doing that routine out of habit until someday, something happens and we realize that we fell out of love with it.
You can use the results of this survey to modify your budget for the coming months, as you now see some routines and services you won’t be returning to. You can instead use the money that was going to those routines and services for other things, like emergency funds and the other strategies listed below.
3. Find a balance between eating at home and eating at restaurants
One big advantage of this social distancing period is that it has given a lot of people a chance to cook at home and sharpen or renew their cooking skills. Many, many people have learned that, with a little practice, cooking at home has delicious and inexpensive results with less time and effort than one might expect.
Going forward, many people will likely find a new balance between eating restaurant, take-out, and delivery food and their own meals at home that they now feel much more confident in preparing. I know this is certainly true for our own family, and it’s true for some of our friends as well.
This can be taken into account in your family’s budget. If this is the approach you’re planning to take as restaurants reopen in your area, you can definitely cut a portion of your food spending from your budget, because the cost of home food preparation is much less than the cost of getting food from restaurants.
Take our family, for instance. Most Fridays, we would have a pizza and movie night at home, and some Fridays, Sarah would pick up pizza on her way home. With five of us, including two teenagers, that meant a lot of pizza — the bill was often in the $30 to $40.
Over the last couple of months, we’ve maintained that “pizza and movie night” routine, but exclusively with homemade pizza. I’ve become really efficient at making the pizza dough and assembling the pizzas, and the whole family really likes the homemade pizza I make. Thus, going forward, we’re going to mostly have homemade pizza on movie nights.
My homemade pizzas cost about $4.50 or so in ingredients, depending on toppings. I usually make three different ones, so we have some leftovers, and thus the cost is $13.50. That’s a savings of about $25 each week that I make my own pizzas versus getting carry-out pizza.
This doesn’t mean that we didn’t like the carry-out pizza — we certainly do. What it means is that we’ve learned to lean on our homemade pizza a lot more, and given that it’s delicious and inexpensive, our old carry-out routine is going to be less frequent, not because we dislike it, but because we’ve somewhat mastered a really good lower-priced alternative.
That savings adds up, and it can have a real impact on your monthly budget. Account for it by trimming the amount you expect to spend on food going forward by a small amount, freeing up funds to be used for other things.
4. Pay down high-interest debt.
Once you have an emergency fund in place and being automatically funded, and assuming that all of your bills are paid up to date, the most important task for your remaining extra money in your budget is to apply it to high-interest debt.
Those debts are a much higher priority than your other debts, simply because a high-interest debt, if left just to minimum payments, will grow in size at a much faster rate than lower interest debts. A credit card debt with a 30% interest rate will add $300 to a $1,000 balance over the course of a year, while a student loan with a 5% interest rate will add just $50 to a $1,000 balance over the course of a year. Lower interest rates can wait a while, but high-interest rates need to be cut down to size quickly.
So, what’s the best approach here?
First, make minimum payments on all of your debts. This strategy is solely about making extra payments on debts, not about skipping minimum payments.
Second, try to take advantage of credit card offers that let you transfer balances at 0% interest. These offers let you take the balance off of a high-interest credit card and put it on a new card, usually with 0% interest for a period of time (often 12 or 18 months). If you do this, you should still consider it a high-interest debt, but it should be a relatively low priority among your high-interest debts.
Third, call up your lenders and ask for interest rate reductions because you’re trying to budget your money and are uncertain about your financial and economic future. Many lenders will lower your high-interest rates a little bit, but there is a risk that they may close your card if you aren’t consistently making payments on that debt, or if you rarely carry a balance. They’re more likely to work with you if you consistently carry a balance, but also consistently make payments (this isn’t really great for your own finances, but the companies love it and will want to keep you as a customer).
Once you’ve taken those steps, make a list of your high-interest rate debts in order of interest rate, with the highest one at the top. You should include any high-interest debts that are temporarily lowered to 0%, but put them at the bottom of the list. Then, budget for making an extra payment on that first debt on the list. The amount should be something you can easily afford, like $100 a month (if you can afford more, great), but you shouldn’t be risking situations where you fall back into adding to that credit card balance.
This will cause you to rather quickly pay off that debt. When it’s paid off, bump up the “extra payment” amount by $100 per month and start throwing that new “extra payment” amount at whatever the new top debt on your list is. Keep repeating this, bumping up your “extra payment” amount with each debt payoff, until they’re all gone.
5. Nudge up your retirement savings.
One thing you should consider doing in the months to come is to bump up your retirement savings.
If you already have a workplace retirement account or a Roth IRA, this is as simple as logging into that account and slightly bumping up your contributions. You might, for example, bump up your 401(k) contributions from 5% to 8%, or bump up your weekly automatic Roth IRA transfer from $50 to $100.
If you don’t have a workplace retirement account and there’s one available, this is a great moment to sign up and start contributing to that account. Many workplaces have online signup tools, so you can do this immediately.
If you want to start saving and there isn’t a workplace retirement account available to you (and you make less than $122,000 a year, or a little more than that in some situations), then sign up for a Roth IRA through the investment house of your choice — preferred choices from The Simple Dollar’s team include Vanguard, Fidelity, and Schwab — and set up a regular automatic contribution from your checking account, up to $110 a week at your discretion, and choose an investment option (a Target Retirement fund matching your expected year of retirement is a great option).
Why do this now? There are a few reasons.
One, saving for retirement is always a good choice for your money. Everyone will be glad to have extra money set aside in their later years, even if they don’t necessarily choose to retire. Remember, retirement savings doesn’t mean putting aside money so you can someday sit at home all day. It means giving yourself a lot of options for whatever you want to do depending on the state of your health when you’re older.
Two, investing when there’s an upcoming recession and after a recent downturn in the stock market is a good idea. Even if you can’t time the bottom of the market — that’s impossible — you know that stocks are still cheaper now than they were a few months ago, and they’re going to go up as the economy recovers over the next several years. Starting retirement savings now lets you ride that rocket.
Three, if you’re spending less now than you were before, you have the resources available to bump up your retirement savings. You’re at a point where your situation has afforded you some financial flexibility, so take advantage of it.
Having said this, I would prioritize bumping up retirement savings below having a healthy emergency fund and paying off high-interest debt, but above some of the other options below.
6. Save for your children’s future.
If you have young children, one thing to consider is the option of putting aside money for their future education. Whatever they choose to do after high school, whether it’s trade school or college or something else entirely, there will almost always come a point where they face educational expenses, and putting aside money now for them can help them greatly when they make that decision for themselves later in life.
The most effective way to do this is to open up a 529 college savings account. The money stowed away in a 529 can be used at any accredited postsecondary school, which includes most colleges and trade schools. The advantage of a 529 plan is that the money earned while it sits in the account is completely tax free if used for educational purposes.
With a 529 account, you name a child is listed as the beneficiary and make contributions to the account regularly. You can (and should) set up an automatic contribution that pulls a little money from your checking account each month, which you can easily budget for. That money is invested according to your choice, but many such plans offer a targeted investment option geared to maximize return and minimize risk based on when your child is anticipated to graduate from high school.
Most states offer a 529 plan. If you live in a state with a state income tax, look carefully at your own state’s plan, because it may offer tax benefits for using it. If you live in a state without state income tax, take a look at our comparison of state 529 plans and choose one that’s right for you.
I would put a low priority on this type of savings, and definitely put it below saving adequately for retirement, because if your own financial stability isn’t secure in your later years, you will be a burden on any children with which you have a good relationship, whether you see that burden or not.
7. Invest in yourself and in reducing your future expenses.
A final thing to consider using your newfound budget surplus for is investing in yourself, whether through education or other things that can help you earn more going forward or by investing in reducing your future expenses.
If you are thinking about getting additional education in the future, consider opening a 529 college savings plan for yourself, as described above. You can deposit money now, watch it grow over the next few years until you decide to go back to school, and then use that money tax-free for those expenses (the money you earned in the account is tax-free in this situation).
You might also consider investing that newfound money in savings for a big investment that will reduce future expenses, like solar energy or geothermal heating and cooling. While these investments have a big upfront cost, they’ll permanently reduce your energy bill and add to your property value going forward.
You can budget for both of these things by simply adding a line item for them in your budget and setting up a savings account or a 529 account for those goals.
The future includes risk, but it also includes opportunity.
Right now, many of us have learned how to live while spending less than before, and many of those lessons can be carried forward into whatever the future holds for us. That future includes some risks, but it includes some opportunities as well. Smart budgeting takes advantage of our changing behaviors to minimize the impact of those risks (through things like emergency fund savings) to help us take advantage of many opportunities.