COVID-19 has reminded us all that life can change in the blink of an eye, indiscriminately and without warning. Just a short time ago our economy was humming along, with an unemployment rate of just 5%. Americans were buying homes and cars and using their credit cards for all sorts of purchases, and personal debt was on the rise. In 2019 consumer debt reached a record high of $14 trillion, surpassing pre-recession levels. Yet despite all that spending, overall delinquency rates were at record lows and FICO® scores were never higher, according to Experian. So, although people were incurring more debt, they were also working and managing to make their payments on time.
Let’s fast-forward just a few months to the beginning of 2020. Now, we’re not medical experts - we’re debt experts, so we’re not going to talk about how the virus spread or what to do to keep yourselves safe. Our expertise is in helping people to develop and manage their household budgets and to reduce and eliminate their debt, skills that are critically important now that we’re in the middle of what could be the worst unemployment crisis in the history of the United States.
It still seems unthinkable, but over the span of just a few weeks, millions of Americans saw their income reduced or eliminated, at least temporarily, through the ripple effects of the pandemic. As unemployment levels rose toward Great Depression levels, many items that were once thought to be necessities became luxuries. Frivolous spending turned into panic-buying, as many consumers swapped one poor financial habit for another. What a difference those few weeks have made.
If your income has been reduced, the first thing that you need to do is take a long, hard look at what you’re actually spending your money on. It can be a daunting task, but it’s something you simply must do. Our clients are always amazed when they complete this exercise because they realize that a lot of their money was being spent on non-essential expenses. Let’s begin.
At Cambridge, we’ve always recommended that clients journalize their expenses for several months to find out where every dollar is actually going. In the middle of a crisis, however, when every moment counts, there may not be enough time to track expenses beyond a single month, but even that’s worth doing. Most people come to discover that, if you journalize every single expense that you make on a monthly basis, it can be an eye-opening experience. In this case, we just want to see all of our expenses so we can establish priorities and eliminate wasteful spending. Click here to download our journalizing and budgeting worksheets and other personal finance tools and guides.
As soon as you have a better understanding of where your money is going, you can categorize each of your expenses as a need (necessity) or a want (non-essential). This isn’t always as easy it sounds, but you may discover that the choices are more obvious when you’re dealing with an emergency. Our goal here is to create a temporary crisis budget. This type of budget is almost always a short-term plan to help alleviate a temporary strain on your finances. While there’s plenty of controversy about when businesses will be allowed to reopen, it will happen at some point. Let’s assume this situation is temporary.
Bearing the temporary nature of your crisis budget in mind, work your way down the budget sheet line by line, asking yourself, “Can I live without this expense for the next few months? Is this expense critical to my family’s well-being?” In an emergency, your list of necessities should be very short and should include things like mortgage or rent, utilities, food, prescriptions, etc. Your list of wants and needs can be adjusted as you create your crisis budget and determine how much “extra” income, if any, is available at the end of the month (more on that later).
Now that you’ve journalized and prioritized your expenses, you can begin to create your temporary crisis budget. As you do so, it’s important to remember that a household budget isn’t etched in stone. It can be adjusted and re-adjusted as your circumstances change. For example, let’s say that your company is still open, but your overtime hours were eliminated for the time being. As the economy improves, overtime is phased back in, at first for a few hours each weekend and then, after three more months, to its pre-crisis level. In this scenario, you can begin restoring some of your expenses accordingly.
You will likely be able to identify with one of these statements:
Great! But if this describes your situation, you should be using some of that “extra” income to build your savings. This is the perfect time to create or increase your emergency fund so that you’re prepared if you do experience a loss of income in the future. We recommend that you have at least 6 – 8 months of monthly expenses put aside in the event of an emergency. So, if you’re currently able to meet your obligations and have extra money left over at the end of the month, save, save, save!
If this sounds like your household, the first thing you want to do is take another look at your expenses to see if any of the “needs” you identified aren’t really necessities. If that’s the case, maybe you can reduce your expenses a little further to give yourself more of a cushion every month. If you have credit card debt, there are a few options available to reduce those monthly expenses, often by a significant amount. For example, clients enrolled in Cambridge’s debt management plan save an average of $135 per month on their credit card payments. Click here to schedule a debt analysis with one of our certified counselors to see how much you can save through our non-profit program.
If you’re going to be a little short every month, don’t panic! When deciding which actions to take, you’ll need to consider the amount of your deficit. Again, take another look at your budget. If you’ve allocated $800 per month for groceries, can you make it by with $700? Do you need Netflix, Hulu and Amazon? Can you live without HBO until your income improves? For those of you in quarantine, keep in mind that some of your normal monthly expenses are probably already reduced. Some people are already saving hundreds of dollars per month on gas alone! So be sure you’ve considered your current expenses. If your expenses are rock bottom, could you increase your income by taking on additional, temporary work, until the crisis subsides?
If you’re one of the millions of people who have suffered a dramatic decrease in household income, don’t lose hope. There are options for you, too. The CARES Act has allocated trillions of dollars to help ensure that all Americans are able to sustain themselves until the workforce reopens. The first thing you’ll want to do if you’ve lost your job, even if you’re self-employed, is to file for unemployment immediately. There is no time for delay.
Your newly minted crisis budget can answer this question for you. Is the amount of your stimulus check enough to pay off a bill that went unpaid during the emergency? If you were able to make ends meet, is now the right time to restore any of the non-essential budget items you had temporarily eliminated? Do you want to put some or all of your check into your emergency fund, in case there’s a resurgence of the virus before effective treatments or a vaccine are available? If your needs are satisfied and your emergency fund is adequate, would you donate your check to someone less fortunate or to a charity?
The COVID-19 outbreak has changed our lives overnight, leaving millions of us struggling to pay our bills. Cambridge Credit Counseling has partnered with AAA Mid-Atlantic to help members more effectively manage their household budget and save money. Our certified credit counselors are standing by to review your budget and discuss solutions that may help you save hundreds of dollars every month on your credit card and other unsecured debts.
Average credit card interest reduced from 22% to 8% or even 0%
Our clients save an average of 24% ($125) on monthly payments
Cambridge clients are debt-free in less than 4 years
Whether you've been laid off, furloughed, or have had your income reduced, it's important that you try to save money whenever you can. This is where the expertise of our counselors can help you the most. Our team has been helping people reduce their expenses and save money for nearly 25 years, and we're standing by to help you and your family as we get through this crisis together.
Watch this short video to learn more about
Learn the benefits of debt consolidation with Cambridge! Call 888-569-6704 or complete the form above to get started.Get started
Cambridge maintains an A+ rating with the BBB and was named non-profit of the year in 2019
Cambridge has been certified to the ISO 9000 quality standard since 2001
Our clients have rated our services at 5 out of 5 stars on ConsumerAffairs.com