|Incarnation (#100) By Mark Ryden|
So how do we prepare for an event like this. How do we know that we are making a responsible decision?
BudgetBefore you know what the future holds you need to know what's in your past. Some people don't know where their money is going at all, for this I prefer to use Mint. It's a budget tracking tool that shows you where all of your money goes. It takes a little bit to get all of your accounts linked up but once you have everything there it's really easy to navigate and see what you're spending your money on. There's also an app called You Need A Budget (YNAB) that is very popular for budgeting, some people say that YNAB is more proactive with your budget than reactive like Mint where you just see where your money went after you spent it. I've never used YNAB, the first month of it is free but after that there's a fee so I've never been that interested in it, but I do hear positive things.
Knowing where your money goes is a huge first step. If you find that you're spending $1500 a month on food for one person then you could probably tighten that up, because $50 per day is probably more than you really need.
Simulate Your New ExpensesOnce you know what you're doing with your money, hopefully you found a few places to tighten things up while you were there. The next step should be to see if you could get by with your new expenses (or perhaps lower income). If you have enough time to implement this test run before it's actually time to do it you should try actually setting aside the money that would be going to this new expense. I would recommend putting our "simulation" money some place different than your regular checking account, that way you don't get tempted to spend it something when we are pretending that money doesn't exist. If you have a separate savings account for an emergency fund then this might be a good time to pad that account a little. If you don't have a separate account for this then this would probably be a good time to start that emergency fund. :-)
If you know you'll have $300 less income during this change then set aside $300 each month in the simulation. Or if you'll be moving to a bigger home because of a new child and rent will increase by $800 then set aside that much.
The two major keys are to accurately project how much you will really be spending (this could be hard with a new baby) and to pretend that this money does not exist anymore. If you can make it through the month with ease then you know that your new budget will work. Personally I like to error on the side of caution so I personally recommend to overestimate your costs. The worst case scenario is that you end up with extra money which is always a good problem.
What to do if your simulation failsIf you can't get by with your simulation not all hope is lost, the first thing you should do is re-evaluate your projected expenses. If you're leaving a job then this step probably won't work for you, you will know exactly how much your paycheck was and can do the math. But if you're projected expenses for a new baby are $400 per month (I have no idea what kids cost) then perhaps consider using cloth diapers and knock off $40 a month from your projected costs. If you're planning to move to a bigger house, then perhaps you should move to a "slightly" bigger house, or a house in a cheaper neighborhood.
The second step would be to look at your regular budget you have now. Are their things you can cut back on now. Some people can't get rid of their Starbucks habit but perhaps bringing lunch to work instead of going out will save you a lot. I know it did for me. You could also cut cable or find a cheaper cell phone plan. There's usually lots of things that people can cut back on. And it's not because they can't, it's because they just don't want to. I'm certain that not everything in your current life is a need, you just need to figure out which things are more important, the change you want to simulate, or your life the exact way it is now.
Have you ever prepared for a financial change? What did you do to prepare?