COVID + Credit: How to Adjust Your Budget If You've Been Laid Off
Americans continue to face job losses and pay cuts during the COVID-19 pandemic. Here’s how to adjust your budget if you’ve suffered a reduction in income. [Duration: 2:46]
Reading time: 4 minutes
A growing number of Americans are experiencing joblessness or pay cuts as the Coronavirus/Covid-19 pandemic wears on, and people across the country are looking for ways to adapt to unfamiliar financial challenges.
Since the beginning of March, more than 30 million Americans have filed unemployment claims. Federal officials expect April’s unemployment rate to reach or exceed 16%, which would be one of the highest rates since the Great Depression. With these unprecedented levels of unemployment and a deluge of information everywhere you look, you may not know how to get a handle on your finances if you’ve recently been laid off, furloughed or taken a pay cut, or if you expect such a change is coming soon.
These five suggestions can help you adjust your budget if you’re facing a reduced cash flow:
Evaluate your current spending and savings.
Before you make any decisions about your financial priorities during the pandemic, it’s helpful to evaluate your current cash flow. Take stock of where you’re spending money and separate those expenses into two categories: things you can’t live without (such as housing, food and utilities) and things you can give up for now (such as online shopping, digital subscriptions and takeout). Determine how much you can reasonably afford to spend on your needs, and try to save the money you would normally spend on your wants if there’s some left over.
Next, figure out how much you’ve saved up, whether in a checking or savings account, an emergency fund or another location. Try to plan out how long these funds could cover your lost income. This can help you determine how much additional financial support you may need per month to stay afloat.
Estimate your new monthly cash flow.
After you’ve successfully evaluated your current spending and savings, account for any additional money that may be coming your way, including unemployment benefits, government stimulus checks and other aid. If you haven’t yet applied for unemployment benefits, read more about that process in our COVID + Credit Knowledge Center. While it can be challenging to predict when these types of government aid will reach you, knowing how far that money may stretch can help you better prepare for the road ahead.
Determine where to make cuts.
Now that you understand your current spending and savings as well as your additional monthly cash flow, you should have most of the information you need to determine where you can cut back. It’s likely that you’re already holding off on major purchases and extraneous spending, but see where you may be able to reduce costs even further. Think long and hard about each nonessential item you consider buying, and try to stay focused on your long-term goal of persevering financially through this pandemic.
Explore your debt repayment options.
If after crunching the numbers you feel you have limited resources to repay your debts while also keeping the lights on, reach out to your individual lenders to work out debt repayment alternatives. Especially during the Covid-19 pandemic, lenders are offering a variety of options for struggling borrowers, including deferred payments and forbearance agreements. Easing your debt burden, even for just a few months, may buy you enough time to recover. You never know what offer may be available until you ask.
Consider more substantial alternatives.
If you’re strapped for cash now and the options listed above aren’t enough to get you through, you may need to take more drastic action to keep up with your living expenses. Consider reaching out to friends and family members to ask for a personal loan, as they may be willing to offer you more agreeable terms than a traditional lending institution.
If you’re a homeowner and have time to prepare in advance before losing your income, consider refinancing your mortgage to take advantage of a lower interest rate, reduce your monthly payments and free up some much-needed cash. You may also want to take out a home equity loan or a home equity line of credit, both of which leverage the difference between your home’s value and your mortgage balance.
As a last resort, consider withdrawing from a retirement account. Be aware that if you decide to tap a traditional IRA or a 401(k) account, you may owe tax on the withdrawals and you may have to pay a penalty for withdrawing your money early. Roth IRAs, however, allow you to withdraw your contributions (but not your earnings) tax- and penalty-free after five years, although there are exceptions to that rule. Talk with your tax advisor for more information on how a retirement withdrawal might affect your finances.
Even though you may not be able to control a job loss or a pay cut, you do have the power to adapt your budget to stay on top of your monthly finances and weather the storm.