Great Lakes Credit Union has everything you need to help manage your money and plan for the future.
Money SmartsApril 14, 2020
What if you got a phone call one day and find out your industry is not doing well financially, and all employees may take a pay cut? Or you came home one day to find out your partner just got laid off. Maybe you've had a successful business, but one day wake up to a slump in sales that could go on for months due to the current economy.
We have all, at one time or another, had a financial shock that arrived without notice. Unexpected events like these are terrifying. An unfortunate reality is that the above examples are increasingly common as COVID-19 has more and more of an economic impact. When households experience some form of financial hardship, it's time to review a bare essentials budget.
Necessary vs Discretionary
When someone sits down to do a household budget, they are usually categorizing spending in two broad categories: Necessary or Discretionary. Necessary expenses are vital to your life. There is not a lot of opportunities to cut back on 'must-haves,' but it does get us to think about how we spend on items like shelter and food.
Discretionary expenses are where we spend for leisure, such as eating out or going to the movies. This concept may seem simple, but what we consider necessary can significantly vary. A cell phone, car, or internet may not seem "vital," but these all might be vital to your income. What this means is that we often have to look at both "necessary" and "discretionary" expenses to figure out where we can cut back.
Let's take a look at an example:
Jane Doe’s Budget
Jane's expenses went from $1,820, to $1,395. Saving $425 after reviewing only 8 expenses.
Jane Doe recently lost her job. She decides to take a look at her budget to begin cutting back on expenses. Jane spends $400 on food and $50 a month for household items. However, she knows that there are certain expensive foods and cleaning products that she could cut back on. Jane decides to cut back on costlier items in to be more budget-conscious. She researches cheaper brands and estimates spending caps to stay under her limit.
Jane then looks at her rent. Having signed a new lease just two months ago, this expense is not going to change. Jane keeps the rent budgeted as is and moves on to her internet expense; another item deemed essential due to necessary job hunting to restore income. While the internet is a necessary expense, Jane's TV/internet bundle can be reduced to include fewer TV channels for additional savings.
Finally, Jane takes a look at discretionary items to see what she can cut; movies aren't essential, certain subscription services can be removed, and Jane aims to cut back on eating out.
Why an Emergency Budget is Worth the Effort
While not easy, cutting back on spending can significantly help with the stress of keeping finances together. In the above case Jane may have lost a job, but by lowering expenses in her budget, she extends how long her income from unemployment and her reserves in emergency savings will last her. For another person who doesn't make these kinds of budgetary cuts, the stress from mounting bills and dwindling savings can cause adverse impacts.
One thing that is often important to remember is that a bare essentials budget does not have to be forever. Strict budgeting is a safety measure that you follow to get back on track during hardship.
Following a budget while confronting financial difficulty can help you avoid serious debt, hurting your credit, and making sure that you have money to pay for groceries week to week. An essentials budget helps with financial safety and alleviating stress, and it may be one of the most important tools to have during an unexpected life event.
If you are experiencing financial hardship or simply want to chat about your financial future, do not hesitate to contact GLCU at (800)982-7850. We offer several free financial wellness services including but not limited to; budget counseling, debt management, credit counseling, bankruptcy/foreclosure prevention, and more. No question is too big or small for GLCU's HUD-Certified Housing Counseling team and we are standing by ready to assist!