Welcome back to this series on extreme budgeting for extreme times.
Last time, we looked at some of the enforced reductions to your spending that lockdown has caused. Things like eating out, holidays and the like which are simply not happening or perhaps are not happening as much (depending on where you live).
Today, we move onto phase 3 in our 4 step extreme budgeting plan, which looks like this:
Phase 1 - Check Your Past Spending
Phase 2 - Your New Reality
Phase 3 - Cutting Back
Phase 4 - Special Measures
Ok, so if you have be following the steps in this series, by now you would have put together your spreadsheet with your actual spending for the past 12 months and then considered what impact the pandemic has had on your spending, it might have gone down, stayed the same, or, in rare cases, perhaps increased. If you have not already done that work, go back and re-visit those posts below:
If the result of your phase 2 work is that you still have less income than you do expenditure, then now is the time to start cutting back. I know that this is not pleasant. I know that I am always harping on about how you should be living a great life and enjoying your money. All of these things are true, but they are not worth getting into debt for.
I can ensure you that any pleasure you might get from overspending at the moment will be outweighed by the crushing pain of debt later on. If your current income is less than you are spending, you need to get that under control pretty sharpish.
The thing about cutting back is that it is designed to be temporary. When your income improves (hopefully soon), then you can increase your spending and your saving accordingly. For the moment though we just need to stick with it.
Remember in your budgeting spreadsheet you have 4 categories of spending:
Bedrock Expenses - Non negotiable - Think property taxes, water bill etc
Foundation Expenses - Essential, but sometimes negotiable - Food, utilities, insurance etc
Lifestyle Expenses - Not essential - Think eating out, cinema etc
Luxury Expenses - Definitely not essential - Think holidays, new car etc
The pandemic has probably caused your Luxury and Lifestyle expenses to reduce somewhat and that's normal at the moment.
If you are still struggling, the first place to look for savings, is, perhaps surprisingly, your Foundation Expenses.
A lot of people instantly think that they need to cut down on luxuries to reduce their expenditure and you might have to, but I would look to your Foundation Expenses first for savings.
The reason that I recommend this approach, is that, very often, there are savings within your Foundation Expenses that you can make without damaging your lifestyle.
Within your Foundation Expenses you will have things like utilities, car insurance, home insurance, food etc. These are all areas where it is often possible to negotiate a better deal. This means you are saving money without actually losing anything.
If you can achieve similar coverage on your car insurance at a lower cost by using a comparison site, then go for it - it is a win-win. If you can reduce your grocery bill by using a voucher or loyalty scheme, then again, that's an easy win.
These things might not make a huge difference on their own, but small savings soon add up. I would much rather reduce my home insurance cost (so long as you are maintaining good coverage - please don't skimp on coverage!) than miss out on a cinema trip given the choice.
If you have made sure you have the best deal on all of your Foundation Expenses and you still need to cut more, then this is where we have to look to reduce your Leisure and Luxury expenses I am afraid. I know it hurts, and it hopefully won't be for long, but it might be necessary to get you through a crisis.
Look at your list of Lifestyle and Luxury Expenses and put them in priority order - put the ones you like the most at the top of the list and work down.
Now, work from the bottom of the list upwards and cross off the items that no longer fit within your budget.
Hopefully, there will still be some nice things left on your list by the time you complete the exercise.
If not, then this means that your income is no longer covering just your Bedrock and Foundation Expenses. You have two options in this scenario (and you might want to do both).
One option is to look for ways to increase your income. I would recommend you try everything you can here first. I have a post on some ideas to earn extra income below:
You can also check out this article from Save The Student - which is relevant for students and non-students alike!
If you have cut back on your spending and looked to increase your income as much as possible and your expenses are still greater than your income, well then that calls for desperate measures - and that will be the subject of the final post in this series.