If you’ve had a loss of income due to the COVID-19 shutdown, you may be wondering how to protect yourself financially. We look at people’s cash flow every day, so we have a pretty good idea of how people choose to spend. In difficult times, we recommend a triage approach to your spending where you determine which bills are most important to keep paying and which expenses you should – or could – cut. Here are some ideas for budget triage during a tough time.
When we’re looking at cash flow, we start with the income (after taxes) and then deduct the expenses. If you’ve had a reduction in your income, you may have a deficit – and potentially a large one. In our next post, we’ll discuss the best and worst ways to cover this deficit, but for now let’s figure out how to put together a budget. You can find a sample simple budget template here. Just copy and paste it into your own spreadsheet.
Let’s start with your household’s income.
Salary: If you or your partner/spouse earn income from a job, you’ll start by inputting your net pay from an employer. If there is bonus income included here, you’ll want to be conservative in your estimate. Many industries are suffering and a reduction in future bonuses may be likely.
Paycheck benefits: You may want to take this opportunity to review some of your paycheck deductions. Some of these can be reduced even if open enrollment isn’t happening for several months. Look at:
- Transit: If one or both of you is no longer commuting on public transportation, you can stop your contributions to your pre-tax transit account.
- Retirement plan: While we don’t generally advocate for reducing your contributions to an employer plan, a period of un- or underemployment for one spouse may be the exception. Continue to contribute to at least get your employer match (if you have one.) But it’s ok to pause or reduce your retirement plan contributions right now. Especially, if the alternative is accrual of debt.
Self-employment income: If you or your partner still have self-employment income or income from freelancing, estimate the net income. This is your gross income less business expenses and taxes. To estimate your taxes, look at a prior year’s tax return to figure out the proportion of tax owed to your income and extrapolate for there.
Child Support/Spousal Support: Divorced and receiving support?If your ex-spouse is still employed and you’re expecting to continue to receive payments, then add this to your income. If your ex-spouse has had a change in income, you may need to have a discussion about how this will affect payments going forward. If you’re not sure how to proceed, you may need to contact your family law attorney.
Social Security: Age 62 or over?If you or your spouse is eligible for social security benefits, you may start to receive them now. Be careful about taking these benefits, though. Once you start, you’re locked into your monthly payment, aside from annual cost of living adjustments. Though personal situations differ, our recommendation for most people is to wait as long as you can (up to age 70), so you can take full advantage of the benefits.
If your income has been reduced, you may start to rely on a new, hopefully short-term, source of income:
Unemployment benefits: State unemployment benefits have been expanded to both provide increased coverage and also to cover people who would have been previously ineligible to receive benefits (e.g. self-employed people). For New Yorkers, there’s now a maximum weekly benefit of $1,104 depending on your previous income for a maximum of 39 weeks.
DON’T FORGET: This income is taxable just like the income you receive from work. If you don’t have enough taxes withheld, you’ll have to pay the taxes next year. Though it’s difficult, try to plan and put some money aside for this.
Stimulus checks: While 2020 stimulus check will not provide ongoing income, you should receive either a check or a direct deposit payment if your 2019 AGI (or 2018 if 2019 wasn’t filed yet) was <$75,000 (Single) or $150,000 (Married Filing Jointly).You’ll receive: $1,200 per adult and $500 per qualifying child. The amount will be phased out for incomes over the listed amounts. If you didn’t qualify in previous years, but you will qualify in 2020, you’ll receive the balance of the payment when you file your 2020 taxes as a refundable tax credit.
Take advantage of the changing job market: While your industry may have seen a major decline, some industries have massively ramped up hiring: healthcare, State and Local governments, and online delivery services are all hiring right now. While you may not find your dream job (or maybe you will!), you may have a greater sense of purpose if you can earn some employment income right now.
Once you have a sense of your anticipated income, it’s time to make a list of expenses. While this exercise can be daunting, you may feel a greater sense of control once you know what it takes to run your life. This information will also help when you’re searching for a new job – you’ll know how much income you need and also whether your current lifestyle is sustainable over the long-term.
The first step is to separate your expenses into necessary expenses and discretionary expenses. The necessary expenses are those you need to keep you housed, safe, and financially protected. The discretionary expenses are those that give you enjoyment, but you may not need.
If you’re not sure what you spend, look through 6 months of credit/debit card statements and average them. Don’t forget those once-a-year expenses (holiday gifts, summer camp or travel) that may not appear on statements from half a year.
While the government has introduced some programs that may be able to help, fixed, necessary expenses can be difficult to cut. Gas and power utilities are not currently cancelling service for non-payment, many local governments have put a moratorium on evictions, and mortgage and student loan forbearance programs are on offer. However, if you are able to pay these bills, you should. Remember that anything you don’t pay now you will have to pay later, often with interest.
Mortgage Forbearance: If you are going to use a forbearance program, make sure you read the fine print. While you might be able to delay your mortgage payment, some banks are requiring a balloon payment at the end of the forbearance period. That means everything you didn’t pay in the interim will be due in 3 months. While this might buy you some time, it’s going to be tough for most people to make this payment. Whatever you do, make sure you call your lender first to work out a plan. Don’t just stop making payments!
Student Loan Forbearance: Your student loan payments may be suspended. If you have a Direct Federal Loan or Federal Family Education Loan that’s held by the Federal government, your interest rate will be set to 0% during for 6 months and payments are not necessary. However, any unpaid payments will be tacked on at the end of your loan.
Food: If you live in New York City, The New York City Department of Education is currently offering 3 meals/day to all New Yorkers who need it. You can find a list of your local pick-up spot here.
These are often easier to reduce. Some spending (restaurants, travel, etc) is just not happening right now. Other cuts to discretionary spending need a little further thought.
Now’s the time to look through your credit card statements and find those recurring expenses and subscriptions (some you may have forgotten about!) that you can reduce or cut.
- Food-related: While meal prep kits can add convenience, they aren’t generally the most economical way to feed yourself. You’re probably better off doing your own shopping, prepping and recipe-hunting right now. Ditto restaurant-related subscriptions.
- Entertainment (Netflix, Amazon Prime, Hulu), consider keeping one or two services that you use most and ditching some of the extras that you don’t really need.
- Gym: Since you can’t use your gym right now, cancel the payment. There have been news stories about gyms making this process difficult. If you’re having trouble canceling your membership, try disputing the charge with your credit card company. There are many free streaming workouts online for both kids and adults.
- Child-related: Since your kids probably can’t attend anyway, try to pause your after-school or extra-curricular expenses.
- Charity: While we firmly believe in giving back, you need to put on your own oxygen mask before you can help others. Pause your charitable giving until you are in a better financial place. Make a commitment that when you’re in the black, you’ll make up for missed donations.
- Other: Every consumer good seems to be available via subscription, from razor blades to clothing. Pause everything you’re ok to live without.
OTC Medications and Personal Care products: The CARES Act expanded eligible HSA/FSA purchases to include most over the counter medications and menstrual products. If you have an FSA or HSA, you can use it for these, which should free up some space in your budget.
Cable/Internet: Call your cable/internet provider and ask if they are offering any specials. Consider canceling cable TV, especially if you’re keeping streaming subscriptions.
Mobile Phones: You’re home a lot and using more wifi, so you may not need a big data plan for your phone. Further, if your kids have a mobile plan so you can connect with them while they’re out, you probably pause this. They aren’t going anywhere and wifi should be fine for them to talk to friends.
Auto Insurance: Many major auto insurers are giving automatic 15-20% discounts right now. You can also call your auto insurer and ask for an updated rate – then shop that rate to a few different insurers. If you’re not using your car to commute right now, you might find a lower rate. If you switch to a different insurer, you’ll be reimbursed any premium that is unpaid and unused.
Parking: In NYC, alternate side parking rules are currently suspended. Street parking is your friend right now.
Term: Aside from a short grace period, if you have term insurance you’ll need to keep paying in order to maintain coverage.
Universal Life/Whole Life: You might want to review your policy and see if it makes sense to exchange it for a less expensive policy or even a policy that is fully paid up based on the premiums you’ve already paid. Alternatively, if you have a Universal Life policy, you can often pause your premium payments, which will then get deducted from the cash value you’ve already built up.
If you think you might need a loan from your policy, make sure to keep it intact!
Books: Local libraries are offering a lot of e-book content right now. Take advantage of it!
If you’ve cut what you can and are still struggling with a deficit, we’ll talk about the best and worst way to cover your deficit in the next post in the series.
This article is meant to help you identify areas that may or may not apply to your unique situation. Everyone’s situation is unique and that is why it is important to have a financial plan that is focused and updated based on your situation. The Stanich Group, LLC, dba: Cultivating Wealth is a SEC Registered Investment Advisory Firm with offices in NY & CA. Cultivating Wealth is not a law firm or CPA firm and therefore is not in the business of giving legal advice or tax advice.
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