The thought has likely already crossed your mind. Maybe not in these exact words, but in concept. How much does your life cost? With the pandemic spreading worldwide and forcing people to stay at home to prevent exposure, many have had impacts at work. Sure, there are those doing an “essential service” and their impact is they are busier than ever. Others, like us, can work from home, at least for a while. Then there are those whose normal hours are being cut, and, most concerning, there are companies facing trouble that started to downsize almost immediately. With that in mind, have you considered:
How long could my current savings last me if I were to lose my job tomorrow?
To answer that, you need to first figure out – How much does my life cost?
Step 1 – Track your current costs
To know how long your money would last in the event of an emergency – a loss of income in the midst of a global disruption certainly qualifies – you need to start with how much you need to afford your current lifestyle. Only when you know this number, can you answer the question posed above. If you’re just starting, make a simple list of the stuff you buy every month, plus your debt repayments. If you already know this figure, skip ahead. Here’s a sample family of 2’s cost of living:
Our husband and wife team are spending $4,000.00 a month, which means their “life costs” $48,000 per year. Let’s say this family has, for round numbers, $16,000 stashed in a “rainy day” savings account. (Congrats to them on having savings, but they’re obviously not following the baby steps) If they experience a sudden loss in income from whatever they’re making today, to zero, they could survive 4 months off their savings, based on their current spending.
$16,000 savings/$4,000 monthly spending = 4 months of runway.
Step 2 – Are you OK with that?
A family – this family, or maybe yours – would need to decide – if this significant event occurs, and our household loses ALL income, do we feel secure knowing that we only have enough to keep going for 4 months? A sobering question.
The answer might be yes. Could be they’re confident that because of the industry they’re in, (is it one of these?) they can get another job within that time period and replace the lost income.
Mom? Dad? Maybe they have parents or family that they know would take care of them.
Could they be blindly, or semi-blindly, assuming “the government” will bail them out somehow?
More likely though, and we hope this for readers of this blog, being a few short months away from running out of money would not be an acceptable situation. They would want to improve that survival timeline. Every dollar saved off that monthly $4,000 spending would extend the timeline their money would last. This means having a major family discussion on what they actually “need” to live off.
Step 3 – Definition of “need”
There’s a game they use to teach kids about personal finance. A classroom is divided into teams and each group is given a mission – you are going to space. Your spacecraft can fit 16 items. They’re given 40 cards, each with a different item on it, and asked to decide which 16 items to bring. After the groups debate, and come up with their list, the instructor gives them some bad news: due to budget cuts, the spaceship can only fit 8 items! Yikes. It was already hard with 16. So the groups reassess what they need. They eventually come to a consensus, only to have the instructor deliver some bad news yet again – they’re actually only able to fit 4 items. What do you absolutely NEED?
The needs vs. wants discussion isn’t pleasant. But its a necessary one if a family, temporarily, has to make cuts to survive an unfortunate change in circumstance. In the case of determining your household “needs”, the ‘four walls’ is a very solid concept to start with.
The Four Walls
The budget above is already ordered according to the 4 walls, which represent the basic needs people have (bare bones, rocketship):
- Food
- Housing
- Power & water
- Transportation
Cutting their spending down to these absolute bare necessities is an option to extend that 4 month timeline for our sample family. You’ll see that in the figure below.
They’ve managed to drop their spending down almost a full $1,000 / month. They extended their runway to over 5 months before they run out of money, which is 25% longer than they had before.
Notice they completely slashed all discretionary spending, including cell phone. Whether living without a phone is realistic or not, all those savings help.
Notice the credit card and hospital bill minimum payments? Those are there to show how decisions like borrowing money will affect us in the future. Bet this couple would have preferred a phone and maybe internet instead of a credit card payment for shoes and vacations they bought 2 years ago.
Notice the other adjustments they made? Not going out means not paying restaurant prices on food, and not filling the car with gas.
Other help
We are focusing on reducing costs, but there’s also the income side of the equation. Unemployment benefits can come in and help bridge the gap. This week, government stimulus checks are landing in checking accounts for those who qualify. You can sell things. And the most active solution, getting a part-time job, even on a temporary basis, will ease the sting.
Further supporting families’ abilities to keep their four walls up are all sorts of new provisions being granted by lenders and other agencies:
- mortgage payment deferrals without late fees
- the above means renters might be able to delay rent payments if they work it out with their landlord
- banks and credit unions allowing auto payments to be deferred
- car insurance deferrals or even lower premiums (less cars on the road = less risk of accidents)
- deferral for 6 months of federal student loan payments
And many more. If you need help with this, start with www.Benefits.gov.
Emerge smarter about your money
This post isn’t meant to show you how to actually do this stuff. Tracking your spending is not complicated – it can be done in Excel, or even with pen and paper. This post shows you the power of knowing your numbers – how much does your life cost today, and what options are available when you need to adjust? You may spend more than this sample family, you may spend less. You may have more saved, you may have less. Either way, knowing how much your life costs is a critical first step to emerging from this chaos with a better handle on your money.
This knowledge will not only help you get through the current situation, but it will also allow you to plan for another challenge – retirement. Retirement?! Yes. Recall above how we briefly mentioned the link between how much we spend, and how long our money will last? We will be exploring that topic much deeper in another post!