We all know the importance of having a household budget in place to help us maintain control of where our money is going. But, what if a sudden financial crisis were to hit? Would you be prepared? Would you be able to meet your budget obligations on a reduced income? Unfortunately, you never know when a crisis will hit. Layoffs, overtime reductions, or the death of a spouse can happen without much warning, so having a Plan B in place before a crisis hits can help you to continue to meet your obligations as you get back on your feet.
A crisis budget is different from a typical household budget because it helps you identify the items on your budget that are essential and those that are not. When an event happens in your life that drastically affects your finances you'll need to make certain adjustments to your spending lifestyle in order to be able to stay afloat until things are back to normal for you. Too often, people faced with a financial crisis fail to make appropriate adjustments to their lifestyle and end up being unable to meet their primary obligations, such as their mortgage or rent payments, which should actually be your top priority. For example, if you've lost your job and have no immediate opportunities to supplement that income, do you really need cable television to survive? Do you really need to go out to dinner? The answer, of course, is no! You do not need those things, you want them. That's the basic idea behind a crisis budget – identifying those budget items that you need and those that you want, and focusing only on the necessities. After all, what good is cable if you don't have a home to watch it in?
It's important to understand that these changes that need to be made are probably not permanent. Understanding this will make it easier to cut expenses out of your life if you know that you will be able to bring them back into your lifestyle once your finances are in a better condition.
For some, creating and committing to a budget at all is a difficult enough task to accomplish, so it's understandable that the thought of an even stricter "crisis" budget might seem impossible. Again, you have to remember that these extra budget cuts are temporary. Think about the things you spend money on right now that you can live without for a few months (or however long you foresee your financial state to remain in trouble) and cut them out of your budget. Things that are needs can stay, while things that are wants should be removed until you're financially ready to pay for them again. We can sometimes be clouded by what we think we need, simply because we're used to having it. If you're unsure if you need something or not, cut it out anyway. If you're able to function day-to-day without it, chances are it isn't needed. Here are some examples of basic needs and wants to help you decide:
First of all, it's a good idea to create a crisis budget for each possible scenario, because each scenario will result in different sets of circumstances and, therefore, different outcomes. Hopefully, you've already created your monthly household budget and, in doing so, have gone through the exercise on journalizing your expenses. If not, please take some time to read our article on Creating a Budget. We'll assume that you've gone through the journalizing exercises and have created your normal household budget. We'll further assume that in creating your household budget, that you've also cut back on extraneous expenses and that your expenses do not exceed your income. This is a good place to start.
Once your regular monthly budget is in place, you can start putting together your crisis budget. In order to create your crisis budget, you'll need to start by categorizing your budget items as "wants" and "needs". Remember, this is a budget that will only be used in an extreme financial crisis and your goal through this crisis is to survive without losing the things most important to you.
Once you determine what your needs are, you'll now have to try to determine what your income will be, if this crisis budget is for a scenario for a loss of income. If you're laid off, will you get a severance package? Will you be eligible for unemployment? If so, how much will these benefits pay you? A good place to start with regard to income is to re-do your budget as if you had half of your income available. Imagine your spouse lost their job, or you have an enormous hospital bill to pay after an accident. Surprises happen in life and not all of them are positive. Make your crisis budget as extreme as you think it needs to be.
If you find yourself spending an exorbitant amount of money on something that isn't essential to your daily life, and would bring your expenses down significantly, then you should remove it from your crisis budget. Spending $200 on a data plan for your smart phone? Switch your plan to a cheaper phone and remember to use less data during the day. Is your grocery bill holding you back from getting out of the red? A study conducted by Consumer Reports found that, by filling your grocery cart with generic brand items, you could save yourself up to 30% on your grocery bill. Afraid of what generic brands contain? Generic items are typically identical once you ignore the famous label. In fact, some companies have even taken to creating their own generic items to save money without risking the taste and quality of their product.
Here are some examples of a typical budget for a two income family compared to a crisis budget that might be required should you suddenly lose one of those incomes.
Explain to your kids, in terms they can understand, what the problem is and how you plan to fix it. If you attempt to hide what's really going on, they will only assume the worst. Chances are, if you haven't explained what's going on yet, your kids already know something is wrong. They don't know the specifics of what's wrong, but they already sense a difference…and they know it's not a good one. By explaining it to them, even in the simplest of terms, you can put their young minds at ease and prevent them from worrying needlessly.
Want to know a way to take control of your financial crisis? Use it to your advantage. Turn that crisis into a teachable moment and teach your kids the events that led up to your current situation. Spend too much on your credit cards and now you're having trouble paying off your bills? Teach the importance of credit cards and what they should truly be used for. Don't have enough money at the end of the month? Explain the importance of starting, and sticking to, a monthly budget.