Here's the 'Doomsday Budget' You Need Right Now

The COVID-19 pandemic has started a major recession that is affecting young workers the hardest. Tens of millions of people across North America have already lost their jobs, and economists predict more rounds of layoffs in the months to come. Some people are already in financial distress while others, who have a job and savings, might feel OK for now, but need to prepare for the worst, just in case.

According to Erin Lowry, the author of the Broke Millennial books, this crisis calls for a “war-time economics” approach to your personal finances and the creation of a “doomsday budget.” Your goal is to protect yourself during this new period of extreme uncertainty.

Here’s what you should do with any extra cash (whether that’s a stimulus cheque or some form of government aid, savings, or your paycheque) depending on your circumstances.

It’s time to switch into financial survival mode, if you haven’t already. This starts with applying for government aid right away. After that, figure out how much, or rather how little, money you can live on every month to see if you actually have any “extra money.”

To do that, Lowry says to create a bare essentials doomsday budget from scratch; don’t take your existing budget and look for ways to trim. Figure out how much money you need in a month to cover basics: housing, food, medicine, and transportation. If you have debt, or bills that you can defer or reduce carrying costs on, get on that and include the minimum payments. Make sure you understand what affects your credit score.

If you haven’t yet, negotiate a plan with your bank or landlord to reduce, manage, or freeze your housing costs while you’re unemployed. Housing is most people’s largest expense and it will make a big difference to your budget if you can take that off your plate for now.

Your bare minimum budget will help you do the next step: triaging your bills. Rank them in order of which ones you should pay first. The ones at the top should be things that have the biggest consequences for you and the future you months from now. For the lowest priority bills, get in touch with the company and come up with a plan that includes minimal monthly amounts while you’re jobless.

“When you’re thinking of the hierarchy of payments, look at what cannot be taken away from me if I don’t make this payment,” said Lowry. “No one wants to go into default, but if you stop making payments on your student loans for example, they can’t take away your degree.” Once a debt payment is made, you can’t get a refund on it, so be selective about who gets your money.

Lowry says millions of people in this category are in a “horribly difficult spot.” And government aid, whether that is the Canada Emergency Response Benefit (CERB) in Canada or unemployment benefits and a stimulus cheque in the U.S., is temporary.

“There are options right now, but those safety nets might not be there in six months. And there could be continued long-term fallout from all of this so just like in 2008 many people will not be able to pay all their bills,” she said.

Another reality for people in this group is that you may need to use your credit card as your emergency fund. Lowry says to make sure you are using the lowest interest rate card possible and don’t go over your limit.

Any extra money that you can scrape together should either be used to put on your credit card or the lowest-interest loan that you’re using to get by. If you’re not relying on these yet, Lowry suggests you start saving for an emergency, like an unexpected medical expense.

You may feel a lot more secure in this category because you have a job, but according to Lowry, that could change overnight. “It is starting to feel like no job is recession-proof. So many people are losing their jobs and you need to prepare in case that happens to you,” said Lowry.

She suggests making a bare essentials budget (see above) and living as though you’re jobless or just about to be until you have a financial cushion. “Put a pin in any aggressive debt repayment, go all the way down to bare minimum payments on your debt, and put that extra money into savings,” she said.

This probably sounds like a big downer. And if you have a job, you may want to spend your extra cash helping out a local business like your favourite restaurant or coffee shop. Lowry says you can do that once you have savings put aside. She likened it to “putting your own financial oxygen mask on first.” In a few months, if the economy begins to stabilize and you still have a job, you can make a lump-sum donation to your favourite places or charities, or focus on aggressively paying down debt again.

When it comes to savings, the traditional personal finance advice is to set aside three to six months’ worth of living expenses. Lowry points out that “living expenses” should be in relation to your bare minimum budget, not the lifestyle you’re used to living.

“Three months can sound overwhelming so I encourage people to consider a starting goal of getting just one month of your bare essentials budget if you have other big financial demands.” said Lowry.

That emergency money should be in a high-yield savings account so it earns interest while parked there but is easy to pull out if needed.

According to personal finance expert Bruce Sellery, you may be tempted to get into the stock market with your extra money if you’ve been hearing about a great buying opportunity. But he doesn’t recommend it. “If you have a job but no savings, don’t even look at the stock market right now. This pandemic has taught us many things, including how important it is to have an emergency fund. Focus on building up a cash cushion first,” he said.

If you have at least three months’ worth of living expenses set aside and you’re employed, consider yourself “a unicorn,” Lowry says.

She suggests still making a bare essentials budget first to make it clear how much extra money you really have. “Then tack on $100 or $200 to stimulate your local economy, helping out a friend, or charitable organizations. And every other dollar that you make you put into savings,” Lowry said.

When it comes to budgeting that extra money, Lowry recommends dividing it into two categories: one for increasing your savings and the other for spending or helping your community. “You could go 50-50 or 40-60, whatever makes you feel comfortable,” she said.

You may be tempted to invest your money in the stock market these days. If you do, make sure you understand what you’re buying and only use your “spending” money. The money you’re putting aside as emergency savings needs to stay in a high-interest savings account during this economic crisis, or until you absolutely need it, says Lowry.

Sellery suggests thinking about what else you’re trying to save for. If it’s for something shorter-term like a down payment on a home, a wedding, or school, don’t put money for that into the stock market.

But if you are actually saving for retirement, then getting into the stock market makes sense and the best way to do that is as cheaply as possible by using a robo-advisor, an exchange traded fund (a collection of stocks) through a discount broker, or low-cost mutual funds. Sellery recommends a mix of types of investments (stocks and bonds) and looking at international markets too.

“The value of the stock market in the next five years is irrelevant to you given that your time horizon is long. In fact, if the market falls further, you’ll be getting more for your money. You have to picture your 75-year-old self and the needs that they will have for groceries a few decades from now,” Sellery said.

According to Lowry, the best way for Americans to invest in the stock market right now is to continue contributing to retirement accounts, through an employee 401(k) or an Individual Retirement Account (IRA) offered by a financial institution.

Just make sure you’re not investing your emergency fund. “The volatility of the stock market during this crisis is a perfect example of why you don’t want to put risk on money you need in an emergency,” Lowry said.

Alyssa Davies, founder of the personal finance blog Mixed Up Money, says it’s hard to make sense of financial planning right now because no one knows how long this crisis will last. And that’s why you should try to be spending as little as you can for now, without feeling like you’re totally depriving yourself.

“Create a routine that lets you take a moment to check out from social media and news and focus on yourself and your loved ones. Self-care isn’t buying yourself new loungewear online; it’s about helping yourself feel better long-term. So, is buying sweats going to offer that benefit? You’re likely better off meditating, going for a walk, or baking,” said Davies.

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