Has COVID-19
affected your finances?

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.

Dealing with reduced income caused by coronavirus

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.

Step 1: Journalize your expenses

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.

Step 2: Prioritizing. What do I need to survive?

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).

Step 3: Create your budget

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.

• Start by listing all of your current sources of income. Account for every dime that comes into your household that can be used to support your budget. Be sure to only include the NET (after deductions) as opposed to the GROSS (before deductions) amounts from each source.
• Next, make a list of all of the expenses that you’ve identified as needs or necessities and subtract these expenses from your available income. This will give you a preliminary idea of where you stand and what your next steps will need to be. You can find our online budget worksheet here.

You will likely be able to identify with one of these statements:

I have more than enough income to maintain my monthly expenses.

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!

I have enough income to maintain my monthly expenses, but I will have very little extra money at the end of the month.

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.

I have almost enough income to meet all of my monthly expenses, but I will be a little short.

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?

I don’t have nearly enough money to meet my critical monthly expenses until my normal household income resumes.

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.

What should I do with federal stimulus check?

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?