Household spending in times of crisis – Cut what you don’t need!
We are living in extraordinary and unsettling times. Our daily routines at work and home, all our activities, relationships, and finances have been dramatically affected by the recent onslaught and spread of the Covid-19 virus.
With lots of information being shared online on how to focus on your personal health, I wanted to cut through the noise to share some solid tips on how you can take care and improve on your financial health in these potentially testing times.
If your existing budget is fundamentally changing, it makes sense to take a deep breath, consider what options are now available and revise accordingly.
My tips involve looking at your normal spending pre-crisis, setting a plan for the crisis and then all going well, returning to normality during the recovery period from a position of strength.
Step 1 – Understand your pre-crisis spending
With so many of us around the world on social-distancing and lockdown instructions, naturally, our spending patterns have changed dramatically. To weather through this period, take a look at your spending before the crisis started to find real opportunities for savings. Sit down with a pen and paper and go through your credit card and bank account statements, go through all your spending for the last 3 months to get an understanding of:
- Non-essential spending: How much you were spending across entertainment, nightlife, shopping, sports, travel, and transport. These are the categories you are less likely to spend on during this period.
- Essential spending: How much you were spending across groceries, rent, education, utilities, bills, and others expenses that will remain constant throughout this period. Taken together, this should serve as guidance on where you can expect to save on non-essentials and how to budget for the essentials.
Step 2 – Follow a strict budget to increase your savings during the crisis
To start – Be ruthless, cut on the things that you do not need right now!
You’ll need to adjust your spending to this new circumstance and any expenses that can be stopped should be. Some of the extras you may be able to immediately cut from your budget include:
- Dining out
- Extracurriculars for kids
- Electronics and gadgets
- Gym memberships
- Unnecessary subscriptions
For example, if you pay someone for car washing, gardening or dry cleaning, those are expenses you could temporarily put on pause. Perhaps less home delivery and try cooking something fun and healthy at home.
The goal is to trim as much of the fat as possible from your budget to preserve as much of your income and savings as possible.
As you go through setting an accurate budget over the next few weeks, you’ll notice a lot of your offline spending, such as eating out, groceries, and entertainment etc. are likely to now move online. The seamless nature of paying online can sometimes make it hard to keep a mental account of where your money’s going.
Set a budget across specific categories, so you can more easily track your spending in real-time over the next few weeks or months. Categories could be things like “Home”, “Children”, “Utilities”, “Food” and so on.
Knowing how much you need and where to cut back will help prevent you from panicking and weather this period with confidence.
Loss of income
Dealing with the sudden loss of income when the government tells you to stay home can be devastating. If you’re facing lost or reduced income, identify your upcoming payments for loans, credit cards, and bills. It’s important to contact your creditors and billers immediately. They are aware of how the virus is affecting people and will likely work with you. The more you communicate with them, the more willing they might be to work with you.
Increase your savings
Depending on your circumstances, this could also be a great opportunity for you to increase your savings. With so much of our spending tied to social events and gathering, move what you typically would have spent in those categories into a savings account. You never know how long a tough period can last, or what surprises are around the corner, so plan for the worst while we all hope for the best.
Step 3 – Returning to normality: the post-crisis recovery
Resist the urge to splurge! After the crisis, you might have the temptation to splurge and go back to your pre-crisis spending. But doing that, will prevent you from rebuilding your savings. Remember that we can never predict when an emergency can hit us in life. When the crisis passes, take the time to re-assess which non-essential expenses are important, and which are not.
No one’s financial standing can be guaranteed and it’s a good rule of thumb to have 3-6 months of your expenditure in emergency savings available, just to ensure that next time you’re prepared for most eventualities.
This too shall pass
This crisis is not the new normal. These are unprecedented times but stay calm and know that humanity has made it through these events before, and we’ll make it through again. We at Hoxton Capital Management trust you and your family are staying healthy. Our hearts go out to everyone who has been impacted.