Ken: Happy day to you. This is Ken Kaufman, and I am thrilled you’re here for Episode 56 – How to Budget When You Lose Your Income. Now, I do have a special guest here today. This is Grace, my daughter. Grace, will you say hi?
Ken: Grace is going to jump in here in a little bit. She’s got, I think, some insights that are going to help us with this today. Just reset. It has taken now just 4 weeks for unemployment claims to exceed 22 million in the United States in just 4 weeks. The U.S. only has a 150 million jobs available when this all started. Every evidence says that this number is going to continue to increase. This episode is focused on helping all of us think about and process how do we budget when we have no income or perhaps our income has just been significantly reduced.
I have a confession to make here. In this month, the month of April, I do not have income. I’m still working. I’m working long hours in weekends, in fact, trying to help my company get through this crisis and be able to ramp back up. But this month, I am not able to take an income and so I’m going to share with you how I’m thinking about this and how I’m processing how to budget without income. That’s also why Grace is here because she’s felt some of the effects. Grace, how old are you again?
Ken: Ten years old. She’s got some opinions now about what it’s like when no income is coming into the household. Here are the key principles to apply. Very, very simple principle here. It’s actually just one principle. You have two ways to make your money stretch as far as possible. You either increase what’s coming in, or you decrease what’s going out, or you do both. Key principle, one more time. You increase what’s coming in, decrease what’s going out, or you do both concurrently, and that generally gets you the best outcome.
Let’s go ahead in that order and talk about what does it mean to increase what’s coming in. What can our sources of income be if our employment is not creating those sources of income? How do we think about increasing during a time when everything feels like being decreased on us? The first thing that we’ve been able to do in our household is, and we’ve followed the You Need a Budget or YNAB methodology of always living off of last month’s paycheck. One benefit we have this month is that this month we are…I’m sorry. The income that came in in March was all sitting there waiting in the bank for us to use in April. We have some money there to work with. However, we don’t know if, in future months, I may have to defer paycheck or anything like that, and so we’re still being very, very conservative. One way to handle “increase your income” is if you had saved last month’s income for this month. It can help act like an emergency fund. If you don’t have that, don’t worry about it. I’m just giving you my experience and I’ve learned from experiences like this in the past that have just showed me that having that 30 days of income sitting there or 30 days of money sitting there is really, really helpful and perhaps in the future you can work toward accomplishing something like that so that we’re on that paycheck-to-paycheck cycle.
The second thing you could do is you could look at your savings account and possibly transfer some money in. We haven’t had to do that yet but it is on the table. Also if you have separate emergency fund, you can look to transfer that in. One thing that I am just finishing right now is we do have a refund because I overpaid slightly in 2019. Now, the tax deadline has been pushed out to July 15th. It’s usually April 15th. It’s been pushed out to July 15th, but there’s no reason to sit around and wait until that deadline if you’re going to get a refund. You might as well go ahead and get your return done, get that submitted, so you can get your income tax refund. Again, this is all about increasing what’s coming in.
You may have stock market investments that you could think about liquidating. This is tricky because the market’s down from the beginning of the year. It’s not down as deeply as it was but we’re down probably 15% or 20%, the S&P 500 is from the beginning of the year, so not necessarily the best time to be selling and you also have to consider if selling would still create some type of capital gain or capital loss and what that tax outcome would be.
Another option, because of the CARES Act that was passed, this $2.2 trillion stimulus package, we do have the opportunity right now if we’re under age 59 and a half, which would apply definitely to me and my family, is we could go to our retirement accounts and we could pull up to $100,000 out and avoid the 10% early withdrawal penalty, and we could defer the taxes on that over 3 years, meaning we’d pay a third of the tax this year, a third in 2021, and then a third in 2022. That is very favorable treatment of those tax-free or, I should say, the taxable IRA accounts, meaning when we take the money out, they’re going to be taxable.
There is always this option out there to increase what’s coming in to go into further debt. I will never advocate for this unless it’s absolutely necessary to get you through a crunch. My instance here, because we’re trying to apply this to what we’re going through in our family, but we are definitely not thinking about or considering going further into debt at this time.
Now, how do we decrease what’s going out? This is a chance to revisit every single outflow and ask why or what purpose does every single outflow fulfill for us and rethink all of our assumptions and even our priorities. One of the things that’s happened in our house, and some of it’s because of the requirement to reduce social distancing, is our kids have different activities and music lessons that they participate in. That’s one of the reasons why I have Grace here. Grace, tell me what activities and music lessons have been cut from our family’s life since all this started?
Grace: Well, we cut all of our music lessons, and I was in piano, harp, and voice. My siblings were in violin and piano, too.
Ken: Yeah, that’s right. Now, how have you felt about that? Has it felt like a sacrifice? Has it been hard to do?
Ken: You usually like going to music lessons and you love to sing.
Ken: So what have you been doing in place of that? Have you still been singing?
Ken: Outstanding. Have you been playing your harp?
Ken: Somewhat? Okay, maybe we need to work on that one a little bit. There are other ways to maybe keep teaching yourself that skill without having to go to those lessons at least for the short-term. It’s working out okay so far? Okay. But you’re getting ready to start back up hopefully sometime soon?
Ken: Awesome. Thank you, Grace. That’s a great insight. Another thing to think about, when we’re trying to reduce what’s going out or decrease what’s going out, is when anything that is limited right now for us that we’re paying for but we can’t participate in because of social distancing, that might be something to think about cutting. Also, I’ve paused 529 plan investments, contributing to my HSA plan as well as contributing to other long-term savings or investing in what I’ve referred to in the past—you can go back and listen to the episode called Life Event Fund. We’ve gone ahead and put a pause on those things. Again, that’s to reduce what’s going out.
Another thing that we’ve done is we’ve put some strict budgets around how much we’re spending on groceries and dining out, just paying more attention to that than maybe we did in the past. Grace, how have you seen this in our family? Have you seen us changing the types of groceries that we buy?
Grace: Yeah. We used to buy the expensive syrup but now we’re buying the cheap, sugary kind.
Ken: Oh, really?
Ken: And how are you with that? Do you like the sugary kind?
Grace: Yeah, they kind of taste the same to me.
Ken: They taste the same, but you can tell we’re making this effort to try to spend less money right now during this tough time.
Ken: Okay, interesting. But you’re okay and you’re going to make it, you think?
Ken: On the cheap syrup.
Ken: All right, you’re awesome. Okay, one other way to think about this or the way we think about what’s going out is we’ve got to look at what debt payments we’re making. If you have student loans, there are some programs related to the CARES Act that I mentioned earlier that are allowing you to defer for up to 6 months or even up to a year, so you want to be aware of that. If you have credit card payments that are due, credit card companies are doing things to try to give relief and deferring payments. Do be careful. Any time you are renegotiating with somebody that you owe money to, it gives them an opportunity to increase an interest rate or change some terms and conditions that may not be favorable to you. Just make sure that it’s going to be favorable, it’s not going to cost you a lot of money to do. Just something to be aware of. Don’t just jump on any debt deferral option that’s thrown in your way. Luckily right now we’re in a place where we don’t have debt. We sold our home. We’re working on building another one and we’re renting, so we just have a small rental payment each month and no credit card debt. Luckily we’re doing good on this one.
Now, there are some things that you should not cut or maybe there are even maybe a few things you should spend more money on now than you would before. Now, that sounds counterintuitive. We’re going into this period where we have no income and I’m saying, “Hey, maybe you should increase some of your spending in certain areas.” Well, here are some of the ones we’ve seen in our house. The first one is Grace’s older sister, Emily, has always struggled with asthma, and knowing that the coronavirus is something that can affect people who have that type of a condition…Emily has not been using an inhaler or doing those types of things for quite a while. She’s actually been quite healthy, but what we have done recently…what have we been spending money on for Emily that we haven’t in a while, Grace?
Grace: We got her breathing treatments.
Ken: Yeah, that’s right. We went back to the inhaler and some other medication to help her during this time just to make sure that her lungs would be strong in case she, obviously not but choice but, by some type of accident, would be exposed to and contract the coronavirus. Yes, we have seen our medical expenses actually go up during this period of no income. Another thing that we’ve spent a little bit of money on is we’ve shared back and forth with other family members our books, puzzles, games, things to do as a family because we’re spending more time together.
I would encourage you to think about here, this isn’t about spending more money on something but don’t cut, especially if you have an Amazon Prime account and a Netflix account, maybe you let the Netflix account slip and you go over to Amazon Prime and leverage the free content that you have there that you’ve already paid for in your subscription back in February. There are probably other things like that in your life as well. We’re definitely leveraging Amazon Prime right now and we continue to do that.
All right. Our key takeaways today. Increase what comes in where possible. Decrease what goes out as soon as possible. Protect and preserve the essentials, and then maybe even add some things that are going to be really critical for you during this time like we talked about. Here’s my last and final takeaway out of this. This is a chance for us to learn and grow. A financial crisis in our lives, like losing our income, if we don’t learn anything from this and say we had some bad money habits in the past, if we don’t learn something from this and we’re just going to keep repeating those bad habits, we are going to continue to create challenges and problems for ourselves. This is our chance not to beat ourselves up and not to push shame toward anyone. I would never do that or never intend that, but this is a chance to just do an honest analysis and look back and say, “Oh, man, I wish I didn’t have that credit card debt,” or, “I really wish I didn’t sign up for this program,” or, “I wish I had waited to pay for that car with cash rather than get a loan.” There are a number of scenarios. Again, not purposely trying to pick on anyone but this is a chance to just look back and do an analysis as well as focus on, “Hey, what did you do well? Did you have an emergency fund and it’s helping out?” In this case, I’m very grateful that we’ve been living on last month’s income. We’ve been doing that for almost 10 years, and you could have said, “Hey, why am I doing this? It’s a waste. It’s just extra money I could be spending on something else.” But when something like this happens, wow, sure grateful for that discipline that we built into our family. This is just a chance to evaluate and maybe set some goals for the future once you get back to getting income and all those kinds of things.
One of my major learnings that has me feeling some pain through this process is, last year, I actually doubled up on my charitable contributions or I prepaid what I was going to pay in charitable contributions for this year. I prepaid last year. By doubling up, it allowed me to create some tax savings, which it’s totally legal. The tax code allows us to do that but I really wish I had that cash flow right now. I really wish that I hadn’t put it there because that would have given me a little bit more of a cushion or nesting to fall back on at this time. I think we’re going to be all right. I think we’ll be fine. We’ve got other emergency funds and those sorts of things. That’s probably one of my biggest learning lessons out of this.
I guess I do have one last parting comment, and that is, if through this process you found that perhaps you were neglecting yourself in any way or that you should be taking better care of yourself, this is a chance to make some changes and concentrate on that. One thing I noticed was I was getting away from exercise and I was getting too focused on some other things, and every night I’ve actually been going for a walk. I found that it relieves stress, and it helps me feel better, and it helps me sleep better. Not anything financial but, wow, how we feel emotionally sure has a lot to do with how we approach our finances and how we tackle those difficult conclusions.
Grace, before we sign off. Anything else you’d like to share with anybody or anything you’ve learned through this crisis that everybody’s going through?
Grace: That one you re-read books, they’re almost as good as when you read them for the first time.
Ken: You’re saying you don’t have to go buy a new book. Go re-read some books that you read a while ago, and you’re finding all kinds of treasures in those.
Ken: Outstanding. I love that advice. Way to think about conserving this tough time. Well, there it is. This is How to Budget When You Lose Your Income. Many, many thanks to you for joining today. This is a wrap for Episode 56. Happy day.