If 2020 changed the way you think about money, you're not alone. Millions of Americans faced unexpected job losses, business closures, or other dramatic changes to the way they live, work, and spend because of the pandemic. Some of these changes — such as a move toward remote-work, more shopping online, and food delivery — may become more ingrained in our collective spending habits, causing a permanent shift in our budgets. Whatever changes Covid has caused in your household's finances, the start of 2021 is an opportune time to rethink your budget and how it should evolve as the pandemic (hopefully) abates over the coming year as vaccine distribution increases.
We spoke with two financial experts, Derek Dobin, financial advisor at Prudential, and Lauren Maxwell, assistant vice president at Trustco Bank, to examine steps we should be taking to prepare our finances for a post-Covid world.
"In order to create a post-Covid budget for your household, the first step is to identify total monthly income. Many households experienced a fluctuation of their monthly income during the pandemic, due to stimulus payments and/or layoffs," says Maxwell.
As a next step in creating a new budget, Maxwell advises accounting for all of your essential expenses.
For most households, this includes rent/mortgage payments, insurance, groceries, utilities, transportation, savings/debt payments, and child care.
If you've historically found sticking to a budget challenging, Dobin advises using free budgeting apps, such as Mint, YouNeedaBudget, or others to help keep track of your spending.
"These get more valuable with each passing month, and the more complex your budget becomes," says Dobin.
Some key budget lines are easy to overlook, Maxwell says, such as food inflation, which has consistently risen throughout the pandemic. Grocery bills are anticipated to remain elevated and this is important to consider while formulating a budget.
Many households have federal student loans that were placed on deferment due to Covid. If so, it is a great time to place that expense back into your budget and begin to make your monthly payments to reduce principal with no interest accumulation.
Another area to consider when establishing your post-Covid budget is child care. Many households experienced an influx in cash flow due to child-care programs being temporarily shut down. However, because the pandemic increased operating costs and reduced capacity, some child-care programs may have to close their doors permanently. If this happens, it may create a shortage of available spots for families and drive up prices. Households should analyze the cost-benefit of child care post-pandemic, and look for alternative options, if available.
If you have adjusted your retirement savings to free up monthly cash flow, or have eliminated saving toward your retirement, this is a vital item to include in your post-Covid budget.
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Both Dobin and Maxwell say that a post-Covid budget should account for savings opportunities, especially if you've drawn on your emergency savings, or have otherwise depleted resources during the pandemic.
Dobin advises taking a look at your entertainment budget, where many Americans may be able to extend savings post-pandemic. "The economy for TV and entertainment has changed, and that may persist after Covid. Now is the time to call and ask for discounts."
If you're enjoying remote work and if it saves you money on commuting costs, or enables you to live elsewhere more cheaply, Dobin advises trying to make it permanent. "If you can work remotely, or move to a more cost-effective location, try to lock those savings in," he said.
Starting, or restarting,savings is a critical priority. Rebuilding an emergency fund should come first, followed by contributions to a 401(k) or other retirement plan, the advisors say.
"Emergency savings should remain a priority for household budgets post-Covid. If it seems difficult to continue adding to your emergency fund, take advantage of savings programs that your bank may offer," Maxwell said.
If an employer offers retirement programs such as a payroll deduction IRA, SEP IRA, 401(k) or 403(b) plan, take advantage of the program and allocate a percentage of income toward it that the new budget can sustain. If your employer offers a match of your 401(k) contributions — an amount they contribute to your 401(k) account based on how much you contribute annually — it is important to take advantage of it. Not taking advantage of an employer match is the equivalent of leaving free money on the table.
A final step in budgeting involves assessing your debt load and formulating a plan for tackling it.
"Set goals," Dobin said. "Try paying down your highest-interest debt first, such as credit cards. Negotiate for lower interest rates, if possible, to accelerate repayment and lower your monthly bill. And if you have good credit, look for the best cash-back rewards cards or consider a balance transfer to a 0% APR card to make the most of your card use."
Maxwell suggests that if you haven't done so already, taking a look at refinancing your mortgage can be an important consideration in the current low-interest rate environment.
"With interest rates at historic lows, and the expectation from the Federal Reserve that they will remain as is for a period of time, households should consider refinancing their mortgage to attain a lower monthly payment. This could create more disposable income for your household, to be allocated toward emergency savings or paying down debt," she said.
Everyone's situation is unique, and as 2021 begins, there is a mix of vaccine-based hopes as well as rising fears amid another surge in Covid cases. Right now, there is an equal opportunity to rethink our personal finances and the advisors say it could help to create newfound economic stability.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.