In the world of financial planning, there’s often talk of having an emergency fund. This savings account is usually recommended to contain 3-6 months of living expenses (and possibly up to a full year’s worth depending on your unique financial situation). It’s recommended that you have an emergency fund that’s easily accessible, even if you’re retired or nearing retirement. What this conversation overlooks is the need for an “essentials only” or emergency budget.
Having an emergency fund is a fantastic way to protect you in the event of a worst-case-scenario. However, if you’re truly faced with an emergency, it can be helpful to have a spending plan in place, as well.
Knowing what expenses are essential, and what you can effectively trim out of your budget if you’re faced with the unexpected can help you to prepare for any financial scenario you face. For example, many people have dealt with either layoffs or a reduction in salary throughout the COVID-19 pandemic. Even if they had an emergency fund set aside to offset the effects of a long-term, high-impact situation like this, it can still be overwhelming to try and navigate how to budget and spend when your life has changed dramatically.
An “essentials only” budget can help you to prepare for the unexpected ahead of time, making spending decisions much easier when you’re in a high-pressure situation.
So, what do you include in an essentials-only budget? It can be helpful to list out all of your expense categories. It’s okay to ballpark how much you spend on some things, like eating out. Your expense categories may be:
Your essentials-only budget obviously won’t include all of these. As you get started paring down, go through each expense category. Is there any way to minimize that expense, or does it need to stay? A few clearly essential budget line items might be:
You might find that cutting out “extra” spending like gym memberships and eating out is relatively easy. From there, you can make more challenging decisions such as whether or not you’d want to continue contributing to a retirement savings plan in the event of an emergency, or if it’s possible to pause debt obligations until you get back on your feet.
As you build out your essentials-only budget, you get to decide what constitutes a situation that would warrant reverting to bare-minimum spending. An easy example may be if you experience a layoff and have to find a new job. Other examples could include going through a traumatic medical emergency where you’ll need time off from work to recover. Alternatively, you may choose to revert to your essentials-only budget in non-emergency situations if you have a time-sensitive financial goal that you need to funnel extra income toward in the short term.
Do you need help building an essentials-only budget? Reach out! We’re here to support you.
Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.
"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.