When an economic crisis hits, many of us have the same response: Panic. Anxiety. Fear. Whatever the specifics, financially lean times make many of us very nervous, and for the wise, cautious. But stressing out to the extent of an emotional breakdown will only make issues worse rather than solving the problem. Therefore, it’s best to have a simple plan to manage your money during a crisis.
The first step? Take a deep breath, or maybe a hot shower or bath, and then calmly assess the situation. Try to look positively at the problem in a way that will lead to responsible decisions and action.
At of the time of this article, the pandemic known as COVID-19 has swept the globe, causing hundreds of thousands of infections and deaths and thereby creating unprecedented economic, social, and political crises in every region of the world. Even our country had to declare national emergency measures, temporarily sending the country into lock-down. As a result, all but the most essential businesses were forced to close. Their employees were relegated to unemployment and online work – and life has yet to return to normal.
In this article, we’re going to cover some essential questions to assess your financial situation. Then, we are going to address the steps you can take to manage your money in an ongoing crisis. (To learn how to prepare your portfolio for a recession before one occurs, check out our article here).
Before we continue, Financial Professional wants to remind you that all materials in this article are educational in nature. This article is not investment advice. Always consider your personal situation – and the help of a licensed financial professional – when making any investment decisions.
So, How Do You Manage Money During a Crisis?
Just as in any other crisis, this situation unfortunately means that many people are being laid off from their jobs, or having their income negatively affected. As a result, this crisis has forced many to find new ways to manage their money. Generally, we can divide this financial impact on people into three levels of severity.
The first group of people are those who already had contingency funds and are therefore less stressed about their finances. Many of these individuals are able to spend quarantine pursuing personal interests or developing and improving new skills.
The second group saved up an emergency fund of 3-6 months’ worth of expenses, and while they may not currently be able to live life to the fullest, they can still for the most part, go about their normal lifestyles.
Those who are suffering the most however, are those who had no cash saved up but still have to pay large sums of debt and bills.
If you are part of this last group, don’t worry! Take some deep breaths, get a nice and warm cup of tea, and sit down. We’re going to walk through how to move yourself out of a bad situation and into a slightly better one, and how to properly manage your money in a crisis.
Assessing Your Situation
Firstly, let’s answer the following questions:
- Do you still have money coming in?
- Can you continue to live your current lifestyle if you don’t have money coming in?
- Do you purchase a lot of nonessential items each month?
We’ll start by breaking down these questions to help you figure out the best ways to adjust your finances and financial habits during this time of crisis.
Do You Still Have Money Coming in?
This will be the biggest determining factor for many people, as reduced or no income automatically puts many individuals and households in a tough financial situation.
If there is still some money coming in, chances are you’ll be able to afford at least some of your usual lifestyle habits. On the other hand, if you have no money coming in, now is a time to tread with caution and foresight.
Can You Continue Your Current Lifestyle With No Income?
This is an important question in a time of economic crisis, and is one of the base questions for determining how to manage your money. If you have a fully-funded emergency fund, you may easily be able to live the same lifestyle you were before the recession. However if you don’t have an emergency fund (and especially if you have no money coming in), it’s time to take a look at your monthly expenses.
P.S. Even if you do have an emergency fund, it’s wise to evaluate your monthly expenses and cut the fat wherever possible. Especially on the off-chance the crisis lasts more than your 3-6 month supply of cash, you’ll be thankful later. Then in the next crisis, you’ll be ecstatic you didn’t completely demolish your fund.
Budgeting During a Crisis
If you haven’t already done so, now is the time to create a budget. A written budget allows you to examine where you allocate your money each month. This in turn will allow you to efficiently assess your financial situation during this crisis to manage your money properly.
To create a budget, start by calculating how much money you’re bringing in each month (or if you’re going off your emergency funds, 1/3 or 1/6 the total of your fund).
Next up, list out every monthly expense you have (and we do mean EVERY). This includes:
- Mortgage or rent payments on all holdings
- Utility payments such as water, electric, sewage, trash, phone (cell and landline), etc.
- Tax payments
- Subscribed accounts for music, television, newspapers and magazines, websites and package services – even your Amazon auto-delivery items
- Estimated grocery bill for the month (if you keep your receipts, go off the amount spent on last month’s groceries)
- Family Tuesday Takeout Night
- Any applicable pet necessities, such as food, litter, etc.
- Medical expenses such as prescription co-payments
- Gas money or public transportation fare
- Installment payments on previously purchased items
- Any other bill you think will be due in the next 2-3 months
Once everything is laid out in all its ugly glory, check those numbers against your monthly allowance or pay. If you have a positive balance, you may not be where you’d like to financially, but your worries won’t be as great as the worries of those with a negative balance.
If you do have a negative balance, now is time to scrimp and pinch, adjust finances, and find ways to reduce your bills for the foreseeable future especially during a crisis. Now that you have a budget of your priorities, it’s time to examine our final question.
Do you purchase a lot of nonessential items each month?
If you do, it’s time to re-prioritize your expenses. The key to managing your money in a crisis is to ensure that funds only go to where they are absolutely needed.
Nonessential items can include:
Managing Your Money: Food & Drink
Expensive food: If you are in a tight spot financially, now is probably not the time to splurge on expensive steaks and junk food. It’s also not the best time to start eating out (though it is a good time to rethink Takeout Tuesdays). If your financial situation is dire enough, you may need to go on a “beans and rice” diet until you adjust your finances. But it doesn’t mean you can’t still enjoy food! There are plenty of cheap, but delicious meal ideas out there. Maybe you could consider your grandmother’s suggestion for “extreme couponing” on even basic items to save even more money.
Alcohol: For those who just turned 21, apologies, but this may be an unnecessary expense that you have to eliminate if you’re tight on money. It’s not uncommon for people to waste a large amount of money on alcohol monthly. Since it’s not usually cheap (for the good stuff, anyway), the amount of money you free up here may even be enough to put your budget in the black.
Managing Your Money: Lifestyle Expenses
Subscription services: Most people have at least one subscription service nowadays, be it their Amazon account, audio and visual entertainment, or magazines. Many people have multiple subscriptions. During this time of crisis, it may be time to decide which ones need to go and which are essential. (A hint? 90% of them aren’t essential unless you have small, bored children at home). A short-term subscription cancellation may mean the difference between beans and rice or just rice for dinner.
Shopping: For reasons both financial and medical, now is the absolute last time to be going to the mall for a shopping spree. All of the money currently coming in could better serve to keep food on the table and your lights on, rather than the most stylish new pair of shoes on your feet.
Gas: If you have to travel for work, this is a tough one. Usually, the answer to spending too much on gas is to switch to public transportation, but for obvious reasons, that may not be in your best interest. Instead, opt for carpooling with someone you know, or try walking or biking if your destination is close enough. Many places also currently discourage travel, so maybe it’s time to spend more time in the garden, online, or walking to the places you want to go. If traveling is necessary though, try to look for the cheapest gas deals and consider a gas rewards card that offers points toward cheaper fill-ups.
Remember, no one enjoys the idea of cutting all nonessential items from their spending list! However, if you’re in a tough situation, you might have to temporarily sacrifice luxuries in the now so in the future you can live a life of financial freedom.
Call Creditors or Banks
If you’ve done all the scrimping and saving you can and are still coming short, or if you know that you will soon, it may be time to call your crediting and utility companies to see if they will negotiate their terms. Due to COVID-19, many places are proactively offering such services. While this isn’t a way to directly manage your money, crisis measures such as these can be a lifesaver in an emergency.
If that’s not enough relief, call your bank(s) and lender(s) and see if they will accept smaller or delayed payments on your bills. Other options may include extending your credit limit, waving fees, or extending the payment period with no penalties to help adjusting finances during a crisis.
Still Coming Up Short? Time to Boost Your Income!
If you are in absolute dire straits and one of your lenders refuses to budge on the bill, your best option is to go out and make some extra money. Potential for bringing in extra cash include:
- A second job – even if just for a few hours a week. Online businesses are currently booming, as are shipping warehouses and food delivery services.
- Asking better-off friends or relatives if you could take out a loan. Beware: Familiarity does in fact breed contempt! It may be wise to draw up a quick contract with an agreeable timeline of how and when this personal debt will be paid back.
- Taking out a personal loan. While these are not generally advised except in times of crisis and extreme need, now is…well, a time of crisis and extreme need. This puts you at risk of being in greater debt, but if it’s loan or food…
- The absolute last resort should be cashing in your retirement accounts. If you are younger than fifty-nine years and six months, you will pay 10% penalties on withdrawing your funds early, and you will be taxed on this “income.” However, again, if this is your last option in a time of crisis, do what you need to do to keep fed and warm.
We also have this more in-depth, three part article series dedicated to help supplement your income!
A Final Word on Managing Money During a Crisis
For those who are just old enough that this counts as your first crisis, congratulations on learning to manage your money early! You’re likely learning some financial lessons the hard way, be it in your personal life, the lives of your friends and family, or the media.
If you have been through this before and were prepared, congratulations also! You’ve learned from your past mistakes.
For those who didn’t learn from your mistakes last time, congratulations to you, too! Now you have a chance to learn again.
Because after all, we’re all in this crisis together and should applaud ourselves for everything we’ve accomplished to date when it comes to managing our money together.
Some of the most important takeaways from this financial crisis have been:
- Build an emergency savings fund
- Budget your finances each month – and stick to it
- Don’t spend more than you make
- Stay out of debt if possible
There is nothing wrong with sacrificing now to be more financially healthy in the future. There is also no shame in keeping your budget to a minimum after this crisis ends so you can quickly build (or rebuild) your emergency fund. Building good financial habits in a time of crisis might be one of the best ways to learn how to function on the bare minimum. Just ask your great-grandparents.