Covid-19 has given us many terrible gifts, one of them a recession. Global markets are down, many companies have shut down their businesses, millions of people are unemployed, and the government is borrowing money like never before.
Many financial experts are saying that budgeting is the only way to survive this recession. Is it really so? And, even if it is true, then the next question is, why is budgeting so important during a recession? Why is it necessary to maintain a budget during a recession? Let’s discuss the reasons one by one.
4 Reasons why budgeting is important during a recession
You are mistaken if you believe that the worst is over in 2020. The post-pandemic era will be extremely tough to survive. Unless you take care of your financial life now, you may find yourself drowning in a sea of debt without any helping hand. Budgeting is the financial boat that helps you reach the seashore amidst a turbulent financial storm.
Still not convinced about the importance of budgeting during a financial crisis? Well, then it’s about time we discuss the reasons in detail one by one. So, here we go.
1. Budgeting helps you develop a better financial picture
Budgeting helps you to analyze the condition of your financial boat. Is it strong enough to withstand a hurricane or a tornado? If not, then how should you make it strong and robust?
Look at your financial statements and find out where you stand financially. How much money is coming in versus much of your money is coming out? Prepare a budget worksheet in a spreadsheet and check the numbers. Once you have prepared your budget worksheet, you can see where your money is going. It will also help you to determine if you have enough money to survive a recession without any job.
2. It will help you build your emergency fund
Budgeting helps you figure out how much money you are saving each month. You might be shocked to see that there are no savings at all. Now, any logical person would agree that it is impossible to survive a recession without savings. You need to save money and build an emergency fund.
A good emergency fund is the one where you have saved at least $1000. If you can save more, that’s great. Now, how will you save $1000? Budgeting is the best way to do that.
Budgeting helps to eliminate all unnecessary expenses. It shows you the areas where you can save a significant amount every month. Even if you can save $200 every month, then your emergency fund will be ready within 5 months. If you can curtail expenses in more areas, then you might be able to develop an emergency fund within 3-4 months.
3. It helps you to prioritize your expenses
A budget helps you to prioritize your expenses. This means that you can prioritize your needs and wants. When there is a recession, you should focus more on your needs.
Your budgeting worksheet will help you differentiate between your needs and wants. You can get the exact idea of how much money you are spending on your needs and wants. Accordingly, you can stop splurging on your wants and spend money only on your wants. Remember, unless you stop spending money on what you want, it is impossible to build your emergency fund.
4. It helps you to manage your debts smartly
Although you don’t have to worry about credit card and student loan payments right now, it does not mean that you can skip payments year after year. You have to pay your credit card bills and student loans later. So, you need to set aside money for that. Budgeting helps to generate free cash even during a recession. You can use it to pay off your debts.
Indeed, there is no pressure to pay your credit card bills right now. But, it would be wrong to forget about your debts completely. A wise man would start paying credit card bills gradually so that he does not have to pay a huge amount later. If you are in a financial hardship due to recession, then you can enroll in a credit card consolidation program or credit card hardship program to pay off your bills through affordable monthly payments. Budgeting generates free cash to make monthly payments. And, the credit card consolidation programs help you to save money on your interests. So, you are saving money in both ways.
Furthermore, many debts are now interest free in the Covid era. Therefore, whatever you pay towards your debts now are paid interest free. Every penny you use to pay off an interest free debt will go to principal which is the core of your debt. You may never have an opportunity to pay off only the principal of your debts like this again.
Lack of financial planning and budgeting are the main reasons why people get into financial trouble. People spend more than what they earn. Here lies the basic problem. Recession makes the problem more complicated. That’s all.
Budgeting is necessary for surviving a recession. The financial picture of the country can change overnight during the recession. Therefore it is necessary to save money and be prepared for the worst. Many people have already lost their jobs. Who knows if you are the next one? Instead of wondering what will happen next, it’s best to formulate a budget plan, save money, and build your emergency fund to stay financially secure.
So, what are you waiting for? It’s high time you start budgeting from now onwards.