HarvestingDollars

Prepare For A Recession Or Job Loss With 2 Budgets

I am not a fortune teller, weather forecaster, or an economist. I don’t know if we’re headed into a recession or not, nor can I do anything about the economy even if I did know what was going to happen. I do know what it’s like to to face massive layoffs in an industry that seems to be shrinking daily, and I can tell you what I do to prepare for lean times. I keep 2 budgets.

The benefits of budgeting are legion, but the quick reason for having one is that knowing where you spend every dollar helps you make better decisions. It’s not about being without or scrimping just to get by, but rather it’s an organized way of improving your financial situation and adding knowledge and security in the process.

I’m guessing that most people don’t keep a budget consistently. So why 2 budgets? I keep 2 budgets for times when I’m worried about the future or other MAJOR situations that I can’t really control. The first budget is my normal, monthly budget. The second budget, aka Budget B, is my contingency budget, meaning that it is a worst-case budget. Budget “B” includes only necessities. Actual, honest, hard to accept, no eating out, necessities. The Wants and Nice-To-Haves cannot be found in Budget B. Eating out, Entertainment, Cable TV, NetFlix, the web hosting costs to run this website, the clothing budget, all savings (pre and post-tax), etc are removed.

The benefit of Budget B is that is shows me my true cost to just “get by” should I lose my job, my health, or anything else that has a major financial impact on my family. It’s entirely up to you what you consider a need, but my recommendation is that you think through what you could really do without and still survive. A mental scenario may help: If your friend, family member, or child required an expensive medical procedure and you couldn’t borrow money, how much could you get out of your budget if you really tightened down your spending? I think if you’re honest you could live with some deep cuts to a lot of categories if you had to for a limited period of time.

Most of my Budget B assumptions account for things that are relatively easy to change. Shutting off cable is relatively easy, but selling a house is not. Although I would be willing to sell my house if need be, that is not a quick switch that can be thrown within a short period of time.

Once you have Budget A and Budget B in place you can:

• Determine how many days, weeks, or months could you and your family get by on Budget B given your current emergency fund. Is that enough?
• Decide if your current emergency fund is too much. Let’s say your annual expenses equal $50,000 on your normal budget, and you have a three month emergency fund ($12,500). If you can get down to an annual expense level of $40,000 by reducing the entertainment, restaurant, and clothing expensing without much pain and suffering, you may realize that you don’t need such a big emergency fund. Or viewed another way your 3-month emergency fund would actually last you ~4 months.
• Talk with your spouse about what you would do if you experience a job loss. It’s easier to turn off the cable if you’re both in agreement beforehand than it will be when a major financial impact hits home.
• Use this time to reevaluate your “wants”, and how much you’re spending on these items. Did you really get the enjoyment out of the $3,000 you spent on clothing last year? Could $1,000 of the clothing budget be repurposed for something else?

Knowing your true financial situation and having a game plan during a recession will give you and your family peace of mind. It will also help you (potentially) take your time when looking for a new position or dealing with an issue because you’ll have knowledge on your side rather than stress.

Related Links Around the Blogosphere

• Nervous about a potential layoff @ BluntMoney
• One Nice Thing About The Layoff @ Frugalize
• Surviving a Layoff @ Frugal Village