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How to Change Your Budget in a Financial Emergency

Your budget is basically a plan of action. But like any plan, it should be adaptable to changing circumstances. When an emergency strikes, it's important to have a plan for what to do with your plan.

The COVID-19 pandemic has created financial hardship for many. Maybe you lost your job or took a temporary pay cut. Or perhaps you want to cut expenses to conserve cash during an uncertain time.

Regardless of the reason for your concerns, you hold the power to stabilize your financial future. How? By revisiting your budget and considering changes that could protect your money if you're coping with or preparing for a monetary emergency. Read on for some suggestions on how to rewrite your financial plan and ultimately come out on top.

Tighten Your Budget

During or ahead of a financial emergency, re-examine how you're spending money, no matter whether you're budgeting just for yourself or budgeting for a family.

First and foremost, be sure you've got enough money for the basics, such as food, housing, medications and utilities. To squeeze the most out of your budget for the essentials, consider:

  • Using coupon apps to score discounts on purchases. These deal apps include Coupons.com, Honey, Rakuten and RetailMeNot.
  • Buying store-brand groceries rather than brand-name grocery items. Store-brand products might cost as much as 25% less than brand-name groceries.
  • Asking your landlord whether you can get a break on your rent.
  • Contacting your mortgage company about emergency assistance, such as mortgage forbearance.
  • Reaching out to utility providers for help paying your bills.

It also might pay off to evaluate nonessential expenses. Here are some questions to ask:

  • Can you get by without cable TV, at least temporarily?
  • Can you get rid of some or all of your video streaming services?
  • Are there any mobile apps you're paying for but rarely use?
  • Do you really need that new pair of shoes right now?
  • Is it possible to cancel upcoming trips without losing most of the money you've spent on airline tickets or hotel stays?
  • Can you work out at home instead of at a gym? Since most gyms are temporarily shut down during the coronavirus pandemic, look at canceling your membership or putting it on hold.
  • Can you cook at home instead of buying meals at restaurants? Fixing meals at home typically costs less than eating out, whether you're dining in, taking out or ordering delivery.

Stash Some Cash

If you're not strapped for cash yet, it might be wise to set up an emergency fund with some of the money left after you've covered the basics. The general recommendation: Put aside the three to six months of living expenses. This can help you remain afloat during a financial emergency and can help you avoid taking out credit cards or loans.

Even if setting aside three months' worth of savings seems impossible at the moment, try saving whatever you can. One of the simplest ways to start an emergency fund is to schedule regular automatic transfers from, say, a checking account to a savings account. Keep in mind that putting just a small amount per transfer into your emergency fund, perhaps $25 per week, is better than nothing at all.

If you're already facing a cash crunch, it might not be the best time to establish an emergency fund. In this case, your No. 1 goal should be to cover everyday living expenses. Once the financial storm has cleared, you can consider starting a rainy day fund.

Look at How You'll Cover Your Debts

During a financial emergency, you'll want to stay on top of debt payments as much as possible, including your credit card bills.

One way to keep up with your credit card bills is to prioritize your debts. The avalanche method or snowball method of paying off your debt might work for you. The avalanche method can save you the most money because it targets credit card bills with higher interest rates. But the snowball method could be best for you if you're hoping to reduce the number of bills you have to pay every month. Even if you're not in the midst of a financial emergency, the avalanche and snowball methods can be smart strategies for chipping away at your debts.

Here are the main steps of the avalanche method:

  1. List all of your credit card debts.
  2. Rank the debts from the highest interest rate to the lowest interest rate.
  3. Allocate as much money as you can toward the debt that carries the highest interest rate after making the minimum monthly payments on all your other debts.
  4. After you've knocked out the debt with the highest interest rate, repeat the avalanche process with the debt carrying the next highest interest rate.
  5. Continue the avalanche method until you've wiped out all of your debts.

Here are the main steps of the snowball method:

  1. List all of your credit card debts.
  2. Rank the debts from the smallest balance to the biggest balance.
  3. Allocate as much money as you can toward the card with the smallest balance while still making the minimum monthly payments on all your other debts.
  4. After you've knocked out the debt with the smallest balance, repeat the snowball process with the debt that carries the next smallest balance.
  5. Continue the snowball method until you've wiped out all of your debts.

The avalanche and snowball methods can also be applied to other debts, such as auto loans and student loans.

If money is especially tight, you might consider making minimum payments on your credit card bills until the financial emergency has passed. This approach could cost more money, since your balance will take longer to pay off and the amount of interest you owe will rise. But if you need to make room in your budget for essential expenses, paying at least the minimums—and ensuring all payments are made on time—can help keep your credit in good shape through a difficult time.

Think Twice About Credit Card Purchases

Cash is king during a financial emergency, since it costs nothing extra to pay with what you have in your checking account. On the other hand, putting purchases on a credit card can cost you in the form of interest charges. If you have rewards or cash back cards that you don't want to put in a drawer while you ride out a financial emergency, only use them for essential purchases you know you'll be able to pay off when the bill comes. Otherwise, it might be best to minimize credit card use while you're riding out a financial emergency.

There's another reason to avoid charging on your credit card during a financial emergency: Racking up credit card charges can ding your credit score. How? High balances raise your credit utilization ratio, or the percentage of available credit that you're using. That, in turn, harms your credit score and might make it more difficult to get a new credit card or loan if you need to borrow money down the road. Experts recommend keeping your credit utilization under 30%, but the lower, the better.

Check Into Credit Card Assistance

If you're running into trouble making credit card payments and you've eliminated the avalanche or snowball method as an option, contact your lender. Lenders are well-equipped during financial crises to assist their customers. A credit card issuer or other lender might be able to temporarily stop or reduce your payments, which can free up cash in your budget to pay for more pressing items, such as rent and food.

Explore Government Help

The federal government is sending relief payments to millions of Americans to help them get through the current crisis. If you're eligible for the payment, you could put the money toward essential expenses, credit card payments or other debt. To find out whether you're eligible, how much money you might get and when you might receive a check, visit the IRS Coronavirus Tax Relief page.

Also, the IRS has extended the deadline for filing 2019 federal returns from April 15, 2020, to July 15, 2020. If you haven't filed your return yet and think you'll owe money to the IRS, this three-month extension gives you extra time to come up with it.

And if you've found yourself temporarily or permanently out of work, you might be eligible for stepped-up unemployment insurance benefits under the CARES Act enacted in March.

All of this aid can help you retool your budget and help calm rough financial waters.

Protect Your Credit

Now more than ever, you should closely guard your credit and fight fraud. While it may not change your budget, it can help you protect your finances and save money down the road.

Scammers prey on consumers during crises like the coronavirus pandemic. If someone contacts you by phone or email seeking personal data such as your credit card information, Social Security number or bank account number, don't provide it. If you think the source may be legitimate, hang up and call the listed phone number to find out if the call was authentic.

To catch potential financial fraud, be sure to regularly check your credit report for unusual activity. You can also freeze or lock your credit report to help prevent someone from fraudulently obtaining a credit card or loan in your name. If you freeze your credit, you'll need to lift the freeze before submitting any new loan or credit card applications since creditors can't access your credit file when you have a freeze on it. A credit freeze will not prevent identity theft, but it will help in the event that an identity thief attempts to use your stolen identity to apply for new credit.

Those aren't the only ways to protect your credit. If you're worried about keeping up with your credit card bills and other debt payments, consider contacting a nonprofit credit counseling agency. A credit counselor can offer budget advice and can work with you on a debt management plan. This can provide the financial breathing room you need to make it through the coronavirus crisis or another emergency.

What if I Don't Have a Budget?

We've explained how to adjust your budget during a financial emergency like the coronavirus pandemic. But if you don't already have a budget, what can you do? It's not difficult to get started: It can be as simple as setting up a budget in a spreadsheet or downloading a budget app. Check out our budgeting guide to get tips on creating a budget that can help you weather the financial crisis. Then you'll be prepared to adjust it later on when your financial situation improves.

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