Surviving COVID19: The Anatomy of a Bullet Proof Household Budget

The world is in a chaotic place right now. Jobless claims continue to rise to record levels. Most states have begun re-opening but if early numbers are any indicator the economy won’t look like a V-shaped curve. I suspect it will be U-shaped. We might even get a second wave of infections as major cities reopen causing shutdowns.

The S&P 500 and DOW inches higher with every reported increase in jobless claims. I suspect this is on the expectation that joblessness will force the government’s hand to increase aid measures. So, maybe there will be some safety nets coming, in the form of direct payment but why put all your eggs in one basket? You’re the best person to protect your family from economic pain.

Companies are taking steps to preserve themselves in this crisis. We can look back to 2008 and use history as a guide. Companies who took measures in the 2008 crisis to manage their costs, cash flow, and capital survived the storm. Those who did not, many did not make it through. Though most of us don’t run multi-billion dollar companies we can take these lessons and apply them to how we run our own household.

Opportunities for Cost Reduction

To quote Peter Drucker, “you cannot manage costs, you can only cut them”. Cutting costs is the top of companies’ priorities and should be the top of yours too. Make a list of all your expenditures from the highest cost to lowest cost, and start drilling down from the top. What are the areas with the greatest potential for savings? What can you cut while minimizing the negative impact on your family?

Big-ticket items like family vacations – these can wait. Buying a $300 video game system, buying a new motorcycle, or a set of golf clubs. This can wait. Be strategic. You’ll probably find some of these items available for less later on when cash-strapped companies want to kickstart sales and need to offer massive discounts to make shareholders happy.

Many folks with kids in private schools are being forced to pay tuition even though their children are not attending. If you can put up a stink without jeopardizing their future enrollment do it. See if you can recover even part of the money.

Cash Flow Management

Cash is king, and this will be especially true when consumer credit lines dry up. In 2008 we saw the slashing of credit lines as companies took steps to control their risk exposure.

Cash flow is the flow of money coming into your household, and the money flowing out. Managing this well is essential for survival and to be in a position to take advantage of any post- COVID19 opportunities. Companies cut salaries and staff. You can cut extra services, where you trade money for time, and some tasteful luxuries you’ve become accustomed to in a record bull-market.

Ask everyone if they have any special COVID relief offers. If your mortgage lender, or auto loan, lease company offers any incentives such as 3-months of payment deferral take advantage of it while the offer lasts. Then take the money you would have spent and put it in the bank. Once the payment becomes due you can pay it off but in the meantime it will give you extra flexibility.

You need to spend far less than you think to live a good life

Examine your subscriptions – now is a great time to take inventory of all of the things you pay for each month but don’t use.

Be relentless with your cutting. You can always add things back in later.

Examine your grocery spending. Now that you’re eating at home more it is tempting to justify upping the budget but don’t. Instead look at things you can cut. Preprepared foods may have been useful when you had a 1-hour commute and needed to get something on the table quickly. But now that you’re at home you can spend the extra 10-minutes slicing vegetables. Reduce spending on expensive fruits and cheeses. Instead of $25/lb cheese try a $12/lb one. If you can reduce your groceries this is going to directly improve your bottom line. Remember a $50/week savings post-tax is like earning $75/week more pre-tax (assuming 35% tax bracket)

Cut back on luxury items temporarily. The $60 a bottle of shampoo and conditioner I’m sure makes your hair look amazing. But if you’re not going out in public. If everything blows over and is fine in 3 months maybe treat yourself with $100 shampoo.

You want to increase your runway as much as possible. If you do a good job and nothing happens it will feel like you’ve over-prepared. If you do lose your job or are furloughed you’ll be glad you took these planning steps.

Here’s where our family has done to improve cash-flow:

Item	Monthly Cost	Action
Car Payment	$ 391	3 month deferral
Student Loans	$ 412	Deferred until September 31, 2020
Total	$ 803

Together we have improved our cash-flow by over $800 per month. I consider these “freebies” because they took less than 10 minutes to set into motion and they result in no negative impact to our family. No penalties, no extra interest for taking these actions.

Taking stock in other areas we were able to come up with a few relatively painless items to cut back on:

Item	Monthly Cost Savings	Action
Groceries	$ 112	Buy more private label, skip luxuries
Gas	$ 185	Reduction in driving
Subscriptions	$ 38	Cancel unnecessary subscriptions
Auto Insurance	$ 30	USAA/GEICO offered 15% policy cost reduction
Dog Care	$ 516	We stopped sending dog to daycare, walk her ourselves
Take Out	$ 129	We used to order takeout 1-2 times per week, now we only order once per week
Eating Out	$ 269	We used to eat out every other week. Now we do not eat out at all
Alchohol	$ 86	Stopped purchasing as much specialty alcohol. Positive effect my beer belly is smaller
Total	$ 1,278

Between the two exercises above we’ve improved our monthly cash-flow by $2000 per month post-tax! (almost $3000 per month pre-tax.)

I’m not optimistic we’ll be able to maintain such austerity after the economic recovery but right now I can sleep better at night knowing our odds of surviving a downturn are greatly increased.

How has your household changed spending to prepare for an economic downturn? Please share you experience in the comments below.