4 Steps You Should Take Right Now for Your Post-COVID Budget
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The changes we’ve encountered over the past year have touched every aspect of life, making this an especially challenging time to budget for the future.
Now, as signs point toward re-openings in the U.S., things are about to change again—hopefully, for the better. Here are 4 critical steps you can take today to prepare your personal finances for a post-COVID economy.
Step 1. Take stock of changes in your cash flow
Although easier said than done, cataloging the changes in your cash flow over the past year is an important first step in planning ahead. For each change, pay attention to whether your spending has been higher or lower in that area.
If you happen to be using Quicken, you can find this information easily in either your budget or your cash flow comparison report. To see account trends, such as changes in your savings, run a net worth report and filter it to show only the accounts you want to see.
Income changes. Has your employment situation changed over the past year? Did you change jobs or add a secondary source of income? For now, simply make a note of any changes in your overall income.
Remember to include your stimulus payments as well as any small business loans you might have received if you’re a small business owner or self-employed.
Spending changes. Consider your spending category by category over the past year and note any significant differences. You might, for example, have spent more money on things like food delivery and takeout while spending less on travel.
If you’re supporting additional family members, at least for the time being, try to get a handle on how much your budget needs to allow for that. Adult children living at home won’t raise your mortgage, but they’ll probably increase your food budget.
Tax changes. The 2020 tax year included a number of changes that might have left more money in your pocket than you otherwise would have kept. If you benefited from any tax breaks, be sure to capture how much they affected your bottom line.
Debt changes. With federal student loans on pause, many people stopped making those payments, temporarily reducing their spending. Many homeowners also refinanced their mortgages to take advantage of current interest rates.
On the other hand, those who faced unforeseen financial circumstances might have taken on personal debt to make ends meet, raising their overall debt load.
No matter what your personal situation, take note of the ways in which your debt payments might have changed.
Savings changes. Many people relied at least partially on savings of one kind or another to get through this past year. Whether you dipped into your emergency fund or took advantage of the CARES Act to withdraw funds from your retirement account, make a note of how those funds added to your cash flow.
Goals and planning changes. Did you decide to downsize last year by selling your home or other property? Did you postpone a major planned expense such as a new car, a family vacation, or some other significant event?
Make a special note of any major changes in your spending decisions so you can take them into account during the next step.
Step 2. Note whether each change is temporary or permanent
For every change you listed during step one, the next step is to decide how long that change is likely to last.
For example, did you sell your home or refinance your mortgage? Those kinds of changes will continue to affect your budget as you move forward.
On the other hand, changes like commuting costs might return to a pre-COVID level if you’re heading back to the office soon.
Identifying time frames won’t always be easy, but try to attach a “most likely” end date to each change so you can project adjustments to your budget through 2021 and beyond.
As you go through your list, make a special note of any savings changes you’d like to reverse. If you need to rebuild your emergency fund or pay back that “loan” from your retirement fund, you’ll want to account for that cash flow in your budget.
Step 3. Take stock of new changes on the horizon
Emergency fund. Whether you borrowed from your emergency fund this past year or just need to start one, be sure to build that funding into your budget. Having 3–6 months of savings built up can go a long way toward protecting you against unexpected financial needs.
Work changes. In the coming months, many people will likely be returning to office jobs—and a daily commute—after working from home for more than a year. If you’re among them, remember to include those new expenses in your budget moving forward.
If you’re changing jobs, ask about their work-from-home policy and expectations. A daily commute adds a cost to your monthly budget while working from home can stretch that salary a bit further.
Child care changes. Another effect of returning to work, or returning to a commute, can be an increase in the cost of child care. Be sure to calculate that into your budget along with your other work changes.
On the other hand, the American Rescue Plan Act has expanded the U.S. Child Tax Credit for 2021, and many families will start receiving those payments as early as July, well in advance of filing their 2021 taxes.
Insurance changes. If you’re planning on buying a new car in 2021, remember to include the increased cost of insurance in your budget as well as that car payment. You might also be planning on a change in your insurance portfolio, such as adding life or disability insurance.
Whether you’re adding or removing policies or simply changing your coverage, be sure to include that expectation in your monthly budget projections.
Will and estate changes. With all the uncertainty of the past year, you might be considering an update to your estate planning—or you might have decided to prepare a will for the first time. Like insurance, estate planning is about preparing for the unexpected: You hope you won’t need it, but it’s important to have it in place in case you do.
If you’re planning on changes to your estate planning, such as updating your will or adding a living will to document your wishes regarding medical treatment, remember to account for those legal fees in your 2021 budget.
Debt reduction. As the U.S. moves into a period of post-COVID recovery, you might also be planning on reducing your debt more aggressively. (If you are, be sure to read this post first.)
If debt reduction is part of your financial plan, be sure to account for the extra payments. In Quicken for Windows, you’ll find the debt reduction planner under the Planning tab.
Retirement plan changes. Whether you need to replace funds you borrowed from your retirement plan or you want to raise your retirement contributions to maximum levels, remember to include these changes in your budget planning.
Step 4. Plan for growth
If you already have a budget, a critical look at that budget today can help you set yourself up for success in the coming year.
Are you running a budget in Quicken? That budget is fully customizable, even if you used Quicken’s budgeting feature to generate it for you automatically. Select any category and adjust your spending up or down as needed to see how things change.
Remember, budgeting isn’t about depriving yourself of the things you love. It’s simply about making smart decisions with your money—so you can do more of the things that matter to you today while planning for a brighter tomorrow.
Read about how to create and edit a budget in Quicken:
Or watch our budget tutorials on YouTube: