Newsletter: Household budgeting is extra important this year. Here are some tips to get you started
Good morning. I’m Rachel Schnalzer, the L.A. Times Business section’s audience engagement editor. January is often when people get their budgets in order for the year ahead — and according to financial experts, this year it’s especially important because so many households’ circumstances have changed.
The devastating economic effects of the pandemic have required many people to reevaluate their finances and cut back on expenses. Some have found small ways to save, such as canceling unnecessary subscriptions, while others have had to make bigger shifts, such as moving in with family members to save money on housing. Meanwhile, others have seen their finances improve significantly, enabling them to save more than they would during a typical year.
I spoke with two financial planners about budgeting during a pandemic. Below you’ll find their insight and advice.
Bear in mind: Their suggestions don’t apply to everyone. The pandemic has involved widespread illness — one in three L.A. County residents have been infected by the coronavirus, according to estimates — and has resulted in business closures and high unemployment. Generally speaking, part of budgeting is making sure your expenditures don’t exceed your income. But many people don’t have enough money coming in to cover even their most necessary expenses.
Why should budgeting be top of mind right now?
Even households that are financially comfortable have been thrown for a loop by the pandemic. “The last year, it taught us a lot about [the importance of] planning for the unexpected,” says financial planner Sarah Behr. That’s a big reason for budgeting in the first place: setting aside resources to help you deal with the unexpected.
If you’re currently able to build your savings, it’s smart to take that opportunity. You never know when another bad surprise might hit.
In addition to lost income because of job loss or illness, the pandemic has thrown extra expenses at some households. School closures have led many families to need alternative child care, for example. And while some parents can rely on family members to help out, others have needed to pay for a solution. “Child-care costs are something that we don’t have as much control over,” Behr says.
If you dug into your savings during the pandemic, financial planner Brittney Castro says, you should try to rebuild it this year if possible or at least try to limit the outflows. Managing your budget carefully can help. “Especially when you have significant changes, it’s important to look at everything, get a clear snapshot of what money is coming in and where it’s going,” Castro said.
How do you set up a budget?
“Start with just looking at your income coming in, and you look at your expenses going out,” Castro explains. “You don’t need to get fancy.” She says people can simply use a pen and paper to track income and expenses over time. “That’s the most important part ... you make a game plan of how you want [your budget] to look and then you have to track your progress.”
There are lots of templates online that can get you started on a budget. Look for one that has you list your fixed expenses, such as car payments that stay the same from month to month, and variable expenses, such gasoline and groceries, which vary. Behr suggests picking one that helps you understand exactly where your money goes.
Overall, there’s no real rule on how much to spend on food, housing and other expenses, Behr says. Instead, you should budget based on how much you can afford. If your budget is tight, you might have to spend more of your income on necessities than you wish. On the other hand, Behr says, if you have the means to indulge, she won’t tell you to stop: “I think it’s silly to order takeout every night. But if you can afford it, and you’re still meeting all your other goals, then fine, order takeout every night.”
One framework to consider is the “50, 20, 30” rule, Castro suggests. “50% of the net income is for fixed bills, 20% is what you’re aiming to save for your goals — and that could be building your cash cushion, paying off debt, saving for retirement — and then 30% is what you spend on all the variables or fun.”
What if your expenses exceed your income?
My colleague Jeanette Marantos touched on this question in a story she wrote last summer.
If your necessities cost more than your income, you should consider which expenses could be trimmed or cut out entirely. This usually goes beyond canceling streaming services — for some, it could be possible to move in with a family member or renegotiate for a lower car payment or mortgage payment.
Budgeting is a way to look at all your expenses and identify which it’s possible to cut.
How often should you sit down with your budget?
There’s not a consensus on exactly how often you should do this, but financial planners agree that it should happen regularly.
Behr suggests people track on a quarterly basis. “It gets a little maddening to try weekly or monthly tracking,” she says.
Castro recommends people schedule a weekly check-in with their money and do their best to turn it into a positive, empowering habit. “Money can be stressful and overwhelming for a lot of people, especially when there’s all this major uncertainty happening.”
One way to streamline the process is to limit yourself to one or two credit cards, Behr says. “That way ... you’re not sifting through a bunch of different statements.”
What are some mistakes people make when budgeting?
If you’re trying to save money, you might be tempted to slash your spending to the bone — but if you can afford not to make sudden drastic changes, don’t. “One of the biggest pitfalls is when people try to put themselves on too strict of a budget,” Behr says. “It’s not sustainable.”
For example, if you’re trying to cut back on Amazon purchases, Behr advises you plan on trimming your Amazon expenses by 10% in the next quarter rather than stopping cold turkey. “Ultimately, you have to buy things for your house — your pet needs something, your kid needs something — so it can’t be zero.”
Overall, try not to see budgeting as limiting yourself, Behr says. Rather, she suggests, approach it as seeking an answer to the question: “How much do I spend on average on the things I need to be comfortable and make sure that I make enough money to cover those things?”
Some people are doing just fine
Pandemic-era restrictions have provided some people with an opportunity to save money they would otherwise have spent on such optional things as travel, gym memberships and dining out.
If that describes you, Behr suggests reflecting on how much happiness you got from those extras and whether you really want to resume that spending after restrictions lift. “I have some clients who traveled a lot and spent a lot on music festivals and stuff like that,” Behr explains. “And [now that they’ve stopped those activities] they’re like, ‘Wow ... it feels good to have that extra money.’”
Have you been able to save? Here’s what to do with that money:
“Keep it in a savings account,” Behr says, though “it depends on the person and how much they need and how much savings they already have.” She advises clients to have an emergency fund with enough money to cover at least three to six months’ worth of expenses.
If you already have a comfortable emergency fund, think about investing some money with the help of a financial planner, Behr says. Setting aside savings for retirement is also smart. “Everybody should be doing that, regardless of their age,” Behr says.
If you’re unsure about what to do with your savings, Castro recommends clients “focus on three goals per year,” such as saving for a house, saving for retirement and saving for a child’s college education. “We all have all these goals, but there’s always a priority.”
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Have a question about work, business or finances during the COVID-19 pandemic, or tips for coping that you’d like to share? Send us an email at firstname.lastname@example.org, and we may include it in a future newsletter.