Economic and market upheavals often change the way households manage money—for expenses now and for future needs. The coronavirus pandemic is forcing us to reckon with a “new normal” when it comes to our finances, employment and social lives.
We often think of budgeting as a way to save for specific goals. But committing to a budget can also provide a reassuring framework during trying times, helping you stay confident on your path to those goals.
Earlier this year, clients told us how their spending, saving and investing habits have changed due to the pandemic and resulting economic downturn and market volatility. In the survey, many reported no change or anticipated just a temporary drop in spending.
But when it came to saving and investing, the overwhelming response was that their habits hadn’t changed. Even with all the uncertainty, they said they were managing savings and investment accounts the same as always.
Those results still align with what I'm hearing from clients today: They’re staying focused on the long term. The people who aren’t drastically altering their routines are generally those with a plan—from basic investment goals to comprehensive financial plans and everything in between.
How do they stay confident? They start with a budget.
Budgeting puts you in control of your finances and your future. Will you have to adjust your budget over time? Definitely. Should you abandon it in tough times or when your income grows? Definitely not.
Your plan is the primary way you can achieve success, no matter what your cash flow or financial outlook looks like.
If you’re still working, you’ll need to allot a portion of your income for the future. A budget will help determine how much you need to save each month, even during market ups and downs.
And if you’re already living in retirement, you’ll need to budget for regular income to help ensure that market fluctuations won’t derail your lifestyle.
Start by getting a clear vision of your current and future needs and an estimate of the amount you want to save. Then, examine your everyday finances:
Knowing where your money goes provides good foundation for your future. Use our full budget worksheet to outline income and expenses and set guidelines.
First, add up your monthly and annual income from all sources: full-time salaries, part-time work, investment income, rental payments, etc.
Next, estimate your expenses on a monthly and annual basis, and then what you think you might spend in retirement.
This may be one of your biggest expenses now and perhaps even in retirement. Add up your mortgage/rent, tax and insurance payments, plus utilities, and don’t forget to factor in repairs and regular maintenance. Paying off your mortgage (or other housing changes) can have a major effect on your budget plan.
Consider car payments, maintenance and repairs, insurance and gas for your monthly and annual budget. Will your transportation costs change in retirement? You may be spending quite a bit more or less—make sure your estimate reflects that.
Decide which loans are best to pay off sooner rather than later. You may want to concentrate on paying off higher interest rate loans (credit cards, personal loans, for example) and pay off lower-rate loans (student loans) more gradually.
Replenish any emergency savings; we generally recommend having three to six months of living expenses in an easily accessible savings account. You should also consider whether you’d feel more comfortable with a larger emergency account during uncertain financial times.
Decide how much of your income you want to put toward your investments. Depending on your age and goals, that could be between 10-30% of your income. Automatic investments can help you stay committed to that amount.
Budgeting for health care costs—now and for the future—is easily overlooked. Out-of-pocket expenses can take you by surprise, so be sure to consider all potential costs and possibilities. And when you’re ready for Medicare, you may wish to talk to an expert to ensure you’re choosing the best options for your situation.
Regular living expenses (household and personal items) and discretionary spending (restaurant meals, entertainment and vacations) may take up as much of your budget as housing. Make sure your income can support your other expenses as well as your lifestyle.
Need help? Let’s talk about how your budget fits in with your investment needs.
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