Your post COVID-19 budget: Rediscovering what’s “essential”
Although 2020 brought along many challenges, we encountered lasting lessons that may help provide a roadmap for the future, and many of these insights came from new financial realities.
As we enter 2021, most consumers are viewing the future with a mixture of confidence and concern. While the upcoming vaccine should ease restrictions and help boost the economy, many Americans are still adjusting, from those who lost their jobs to others who are juggling multiple roles to make ends meet.
Conversely, the group that maintained employment during the pandemic might find themselves benefiting from the financial boost and priority shift. A recent Voya survey found that nearly 70% of Americans are currently more focused on saving than spending.
The new year is an ideal time to recalibrate, no matter what budget reality you are facing. It's also a prime opportunity to get back on track with your financial goals. Here are some tips to help you get started.
1. Assess 2020 spending to refine your future financial plans
As our habits and routines changed overnight, so did our budgets. Whether by choice or default, you likely saw drastic changes in your financial life, some of which will continue into 2021.
Start by reviewing your bank statements to evaluate how spending patterns evolved. The key is to focus on trends rather than a single month since things changed so rapidly. Next, identify which categories changed and by how much:
- Did you eliminate commuting costs, such as gas, parking and tolls?
- Did childcare costs vanish as your kids stayed home?
- Did you stop buying new clothing with social functions on hold?
- Did your entertainment costs increase with more streaming and higher bandwidth?
Then see which line items grew; while many could have been erased or minimized, you might have compensated in other areas:
- Did you swap gym fees to invest in at-home equipment?
- Did your home renovation costs consume the former clothing budget?
- Did you end up spending more on delivery as you ate out less?
- Did new home technology expenditures replace commuting costs?
2. Evaluate your new habits and adjust your budget
Now that you have insight into your budget, identify what changes you can make. Look at each expense to decide which changes are likely to last; for example, you may be able to permanently forgo commuting costs if your workplace pivoted to a remote set-up.
You’ll also want to determine whether your “replacement” purchases were a one-time expense, like a new TV, or will be ongoing, like monthly subscriptions to multiple streaming services. These observations will help you build a new budget that fits your current lifestyle.
One simple approach to allocating your after-tax income is by using the “50/30/20” principle. In this structure, you devote:
- 50% to “needs,” such as your housing, utilities, insurance and groceries
- 30% to “wants” like take-out food, clothing and entertainment costs
- 20% to save for future goals, including your retirement accounts and emergency fund
3. Consider your options if you’re facing a financial crisis
Budgeting is easier when you have a steady paycheck, but today many Americans are grappling with financial distress, making it more challenging. If you’re having trouble meeting the “needs” part of your budget, it may be time to supplement your income with a part-time job. Or, if you already have a side gig, see if there are places you can cut your expenses at least temporarily, such as selling a car or getting a roommate.
If you’re worried you might not be able to cover your bills, reach out to your creditors to put a plan in place. Your credit card issuer and mortgage servicer may have relief programs that can help lower your bills.
4. Don’t forget to build in fun
As you compare your old and new budgets to allocate funds in your “wants” category, think about what made you happiest or what you missed the most. For example, according to the International Food Information Council, more than 80% of consumers say the pandemic shifted what they eat and how they purchase food. So as you look at your lifestyle, you may realize you crave the socialization that comes from dining with friends and build those outings into your budget when they become safe. Or, you might discover that cooking at home has become a new hobby and you can easily reallocate those dining-out-dollars to another budget category.
The goal is to prioritize future spending rather than automatically returning to previous habits. As you take a close look at your budget, you might be stunned at how much money you spent on unnecessary impulse purchases. The aim isn’t to deprive yourself, but to reshape your spending to areas that have a meaningful impact on your mental well-being.
Naturally, your ability to spend will fluctuate based on your current economic reality, but every budget deserves a splurge, even if it’s small. Identify affordable pick-me-ups, like gourmet coffee you brew yourself, or even free things, like indulging in a good book.
5. Use a short-term perspective for your budget—but a long-term perspective on your savings
While you shouldn’t ever take a “set-it-and-forget-it” approach to budgeting, frequent tweaks are particularly relevant today, given the uncertainty swirling around many aspects of our lives. You might be experiencing an income setback that will smooth out or you might feel extra flush with the decrease in spending. This is a year to keep a close eye on your monthly budget and frequently adjust as circumstances evolve.
If you’ve been fortunate enough to have a steady cash flow, now is the time to prioritize your savings goals. You may choose to allocate it toward an end-of-COVID vacation or boost your emergency fund. As 2020 showed us, we can never predict what’s around the corner, but we can always appreciate an extra cushion in the form of a healthy emergency fund and retirement savings.
Want some help getting started on your 2021 budget? Try Voya’s interactive 50/30/20 budget calculator for a preliminary analysis that can help put you get back on track with your financial goals and set you firmly on the road to a secure 2021.
For more resources and tools, visit our website for next steps to get back on track with your financial goals.
1Voya Financial survey conducted through Ipsos on the Ipsos eNation omnibus online platform among 1,004 adults aged 18+ in the U.S. (including 534 who are currently working). Research was conducted Nov. 19-20, 2020.
2IFIC Survey: Consumer Viewpoints and Purchasing Behaviors Regarding Plant and Animal Protein (Jan 2021)
This information is provided by Voya for your education only. Neither Voya nor its representatives offer tax or legal advice. Please consult your tax or legal advisor before making a tax-related investment/ insurance decision.