What is your plan of action if your family budget decreases or threatens to decrease? Read our budget planning advice and the most frequent mistakes by Jolanta Jērāne, Citadele Bank’s long-term savings expert.
States of emergency or crises—whether economic or epidemiological—are fairly unexpected and affect almost everyone in Latvia. This was the case in 2008, and it also applies now. We cannot avoid this unpleasant situation, but there are things we can do to prepare.
Start with making a plan
If we assume that a person’s way of thinking has a large impact on what they do and what results they achieve, it is important not to panic or fall into mass hysteria right now. Rather, you should be putting your family’s affairs in order with a calm head. This means developing a plan of action starting with small, everyday things and finishing with big decisions for emergency situations. Everyday activities include re-planning the family budget, or simply planning it for the first time if you did not do so before. If your current or expected income has been reduced or threatens to decrease, your spending must also decrease. Have a look at your daily expenditures and figure out what categories have automatically disappeared (e.g. transport costs to/from work, lunch outside the home, leisure activities, children’s clubs) and which will increase as you spend longer at home.
For these kinds of crisis situations, you will find your previously-built savings (safety cushion) of around 4-6 months worth of expenses very useful. Unfortunately, only a small number of people have these savings. These are the people who are currently in much less discomfort, as they can make decisions which benefit them rather than sharply reacting to any external factors.
You can start saving at any time
What should you do if you don’t have emergency savings? First, review your money management habits and, starting with the next time you get paid, set aside a small amount of money (even just 3 Euro) to start creating a safety cushion. If you don’t start now during an emergency, the memory of stress and discomfort will later fade and your motivation to create an emergency fund will diminish. To start the habit of saving, you don’t need to put aside huge sums, the main thing is to put away money regularly.
Advice which will help during the state of emergency
- Reduce your expenditures (even more than you think you need to). Say no to everything that is not groceries, medicine or utilities;
- Write an exact list of everything you will need in the next few weeks/months, and identify how much money you will need for these;
- If your minimum expenditure is more than your expected income, have a family brainstorm to identify a list of possible income streams. Consider all options: borrowing from your children’s pocket money savings or, most likely, the savings for your cancelled holiday, expected state benefits, other compensation, bank savings or other savings;
- If your expenditures still outstrip your expected income, consider (but do not yet act on) the possibility of taking out a consumer loan. At the moment, you have enough time to compare all the different options. Pay attention to the Annual Percentage Rate (APR) payable for each loan;
- You also have enough time right now to audit your or your children’s wardrobes and sell what you no longer need. The options for remote selling on social media are unimaginably wide;
- If you have outstanding loans and you have lost your job or are on unpaid leave, do not delay contacting your bank to find out your options regarding delaying all or part of your loan payments until a later date;
- When you go shopping, go with a list and buy strictly according to your list. This is not a time for buying things on sale because “they might come in useful later”. Plan and shop for the week;
- Maybe this is the time to achieve a long-held dream which could bring cash flow to your account? For example, crafts, painting, handmade greeting cards, online home fitness videos, etc.
Avoid these common mistakes
- Browsing internet stores to kill time, resulting in unneeded purchases;
- Treating yourself as a reward for staying at home. The classic excuses: I have to distract myself from this madness somehow; what else is there to do; if I won’t have money anyway then I might as well buy this to make me feel better, and so on;
- Increased alcohol use, especially now when alcohol is available by home delivery.
All complicated situations are tests. A test of our values, our ability to react quickly and appropriately to unexpected situations, of how prepared we are. I do not doubt that all of us—whether more or less successful—will also survive this test and return to our normal life. However, only a few (10-15%) will have used this as a lesson for the future, and those who have will have fundamentally changed the course of their life. There is no need to worry about what is happening around us. Instead, I invite you to take this as a learning experience for the future. I invite you to take the opportunities which could only happen in these difficult circumstances and learn to look around at what is happening as not just problems, but opportunities.