Lockdown Budgeting Is A Time To Rework Your Money
The first couple of months in any new calendar year offer a great time to reflect on your finances and set some goals.
Usually, people have overspent at Christmas, and they want to use the quieter (colder) months of January and February to reign in their debt and prepare for all the activities that spring and summer have in store.
Well, this year, the COVID-19 pandemic accentuates this point.
For those of us lucky enough to be in stable work, there is even more potential to save money and reduce debt this winter because pandemic measures mean we’re not spending as much on normal monthly outgoings.
These outgoings could include commuting to work and buying lunches to eat at your office desk.
That’s been the weird aspect of this economic downturn — many of us are actually in a better position to pay down debt.
So, with the hope that mass vaccinations might get us out of these restrictions and lead to a return to normality later in the year.
The question is how to maximize the next few months of stay-at-home measures to the benefit of your personal finances?
Using lockdown budgeting savings to grow your wealth
If your monthly budget has been affected by the pandemic now is a time to consider lockdown budgeting.
The first thing I’d recommend if you’ve got any extra money lying around from your paycheque is to pay off any unsecured debt like credit cards and avoid those interest payments that can plunge you further into the red.
Then, if you’ve still got some leftovers, it’s time to start thinking about investing.
Some of the best advice I ever heard about growing wealth is to make your money do the hard work for yourself so that you don’t have to.
Fred and Frank Saving Money Example
Imagine two guys, we’ll call them Frank and Fred, both of whom earn around $60,000 a year and want to save enough money for their retirement.
Frank already deposits around $100 a month into his cash savings account but decided to take on an extra job in the evenings so that, after-tax, he can put away another $25 a month into the same account to build up a nest egg.
He is working harder, holding down two jobs, burning the candle at both ends to try and save for a rainy day.
But, over time, inflation is going to erode Frank’s hard-earned savings and he’s going to get frustrated that he’s just not making the progress all this extra work deserves.
Fred, on the other hand, chooses to invest $100 of his post-tax earnings into the stock market rather than putting it in cash savings.
History shows us that over the long term — in this case, let’s say Frank and Fred’s retirement horizon is 20 years — the interest Fred is likely to earn on being invested in the stock market will far exceed what Frank can earn on his cash.
If he reinvests the growth back into purchasing more stocks, he’s going to make his money work harder for him so that he doesn’t need to take on that second job.
Fred is converting his cash income into assets that, over time, traditionally outperform, outstripping inflation in a way that cash just can’t.
That’s not to say there aren’t risks with Fred’s approach. Sometimes the stock market crashes.
But if he is sensible with his investment strategy, if he spreads his money into an index tracker fund or a diversified holding that owns little bits of lots of companies, he is likely to reduce some of that risk and lock in the gains over the long-term.
Fred might decide he just wants to increase the monthly contribution into his pension — we’re ultimately talking about the same approach here because pensions tend to be invested in the stock market anyway.
The point here is that Fred is letting the wonder of compound interest do its magic.
Over the course of his career, he’ll be making a big impact on his personal balance sheet through the combined force of small, incremental payments.
You may need to take advice if you’re starting an investment strategy, but my basic point still holds — make your money work harder for you so that you don’t have to.
Having fun with your cash in 2021
We only live once, and the pandemic has shown us just how fragile life is.
While the lesson on financial discipline above is likely to help you save for a better retirement and a more secure long-term future, you’re still going to need a bit of fun to see you through this most difficult of periods.
You should always hold back a little bit of your salary to spend on yourself.
Related: Why we chose to give each other a $50 monthly allowance.
With stay-at-home orders now in place across parts of Canada, bars and restaurants closed, and other forms of recreation on hold, you may need to think of new ways to keep yourself entertained and boost your mental wellbeing through the winter.
- Maybe you want to do an online course to develop a new skill?
- Or take out a movie streaming service so you can call yourself a film buff when you finally go back to see your friends?
Perhaps you used to spend money in the local casino and have decided you want to try a little online gambling for as long as stay-at-home orders remain in place.
There are certainly a few safer places to do online gambling if you want to avoid getting into debt, just play for a little bit of fun and stick to the discipline of being a financial guru.
One such place would be at Playcasinos. Interac Casino Banking is one of Canada’s safest payment methods for online players because its debit payment service means you get to stay in control of your wallet and not go beyond a set limit when it comes to online gambling.
Interac’s number one priority is security, and its innovative technology protects against many fraud tactics such as counterfeiting and transaction replay.
The power of lockdown budgeting
So, we’ve established that you’re going to try and convert some of your income into investments.
These could be assets like bonds or equities that outperform cash over the long-term as a means of keeping some back for spending on personal enjoyment.
You’re also still going to be spending a portion of your salary on bills like a mortgage or rent.
Plus, you might need a contingency or ‘buffer fund’ in case of emergencies.
How are you going to manage all these competing demands on your income and still achieve a restful night’s sleep?
The answer is budgeting — keeping track of your monthly income and expenditure, making sure you live within your means, spending less than you’re earning, and investing the difference into those long-term priorities I talked about earlier.
A basic Excel spreadsheet should do it.
The power of budgeting isn’t in the document itself, it’s in the act of regularly scrutinizing your outgoings and getting into the mental habit of something called ‘delayed gratification’.
That is the practice of choosing to forgo the small pleasure or instant gratification you would experience from making a purchase or consuming something now, in favour of the long-term satisfaction derived from investing in tomorrow’s priorities.
Maybe you’ve already got a perfectly decent overcoat, but you see a new designer one in the store window retailing for $150 and have to toss-up between the instant pleasure you’ll get from buying it or the prudence of investing that same cash for retirement? You get the picture.
Lockdown Budgeting Savings
This considers spending around 50% of your salary on essentials like rent, 20% on savings and debt repayment, and 30% on discretionary items and having fun.
If you want to be disciplined and are willing to make tough trade-offs, you could probably spend more than 20% on savings and debt repayment.
Ask yourself if you really need to eat branded groceries in favour of the discounted supermarket versions.
If not, couldn’t you invest the difference into paying down those credit cards?
Like I said earlier, the priority should be debt repayment and then, once you’ve done that, you will need to pile up some emergency savings in cash.
If you need to replace a broken washing machine, for example, about three months’ worth of outgoings should do it, so that you’re not having to pay for it using your credit card.
Once those two items are taken care of, you can start thinking about some of those long-term investment assets mentioned above.
The pandemic has allowed us to think about what we really value — and some of the unnecessary expenses we used to incur in our normal lives.
Take this opportunity to re-evaluate your key budget lines and see if you could be diverting some of that expenditure into more fruitful long-term avenues.
Hopefully, in the next few months, social restrictions will become a thing of the past.
Use the time until then to get your finances straight.
After all, there has to be some upside to stay-at-home measures.
Discussion: How important is lockdown budgeting to you? Were you able to save more or are you struggling to keep up? Do you allow yourself time to enjoy life with-in your budget categories?
Leave me your comments below.