Crisis Budgeting and Emergency Saving
Picture this: the market crashes, you lose your job, nobody wants to hire you in your current field. Would life continue as normal? Most definitely not. Your spending habits would likely change and you’d be seeking some level of supplementary income by any means available. During economic downturns, sources of income are unstable and impossible to predict, and that’s why it’s important to prepare for them. In this chapter, we’ll discuss crisis budgeting, emergency saving, and how to reprioritize wants and needs during downturns.
Source: HFS Federal Credit Union
To start, one general rule of thumb that financial advisors suggest is that you “live below your means.” This means that you're always spending less than you technically can each month because you’re prioritizing saving, not spending. To actually do this, you’ll need to start by distinguishing needs from wants. Needs include debt repayment plans, insurance, rent, etc. Wants, on the other hand, the 8 movie tickets you buy per month. You can easily increase savings by cutting down unnecessary expenses. That is not to say that you should eliminate all wants, though. As long as you’re avoiding overspending, balance is key. Furthermore, you can reduce existing costs by making small changes: make your own coffee instead of going to Starbucks, use a programmable thermostat to reduce electricity costs, replace cable TV with an antenna, purchase bundled insurance instead of multiple different packages, etc. Interestingly, one unique way you can cut down energy costs is by using electricity during ‘non-peak hours.’ That is, utility companies charge for electricity at different rates during different times of day. Simply doing your laundry at a different time of day might end up saving you hundreds of dollars annually.
Source: SolarSME
But how do you create a budget? First, you should take note of your annual net income – post-tax, of course. If you’re not sure how to calculate post-tax income, here’s a great resource. Don’t forget to include any deductions or credits you may have, as well as the amount of dependents you support. Then, you should track your spending. This includes both fixed and variable costs. Fixed costs, like rent, are generally the same each month, whereas variable ones, like dining out, fluctuate month to month. You can still have a pretty good idea of variable costs based on your past spending habits. Once you’re aware of both your revenue streams and costs, you can make a plan to adjust your variable expenses each month such that you can save more for an unexpected downturn. Also, you can rank expenses by priority. Some are non-negotiables, some are contractual but still negotiable, and others are completely discretionary. By canceling or pausing non-essentials, delaying major purchases, and finding ways to refinance whenever possible, you can significantly increase savings.
Source: The Couple Project
This process of saving for the worst case scenario is called crisis budgeting. The agreed upon consensus is that, through the process of crisis budgeting, you should save enough money to cover your major expenses for 6 to 9 months, though it may be more or less depending on your risk tolerance, monthly income, and how unstable your industry is. It’s also important to note that a crisis budget is a scaled-back version of your normal budget: during a period of financial hardship, you’re certainly not going to be doing so much discretionary spending, so you don’t need to save for it. Instead, simply prioritize survival expenses like housing, food, debt repayment, transportation, insurance, and any additional personal expenses. If you live in the US, definitely be aware of the Consolidated Omnibus Budget Reconciliation Act (COBRA), which allows unemployed individuals to stay on their former employers insurance plan. This can help you save significantly on insurance costs.
Source: Investopedia
And the process of creating an emergency savings fund isn’t as difficult as people make it out to be. Working with your bank, you can set up automatic transfers to a designated savings account. Just making the account puts you ahead of the curve: a January 2025 US News survey found that 42 percent of Americans do not have an emergency fund account. Two different types of accounts to be aware of are regular savings accounts and money market accounts, both of which are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. While you can access a regular savings account whenever you want, the interest rate is slightly lower than that of a money market account (MMA). Notably, even a small percentage interest rate difference can amount to a huge difference in long-term savings. This is because interest on these accounts is compounded, usually on a monthly basis. The drawback associated with MMAs, though, is that they require a much higher minimum balance and tend to have additional fees associated with them. Now, within those two broad umbrellas of accounts, specific plans vary on a case-by-base and bank-by-bank basis. The general goal is to make high-yield returns via interest in a relatively accessible account that you wouldn’t use unless there’s a downturn. So make sure to consult an expert before making a commitment.
Source: Experian
Another quick and easy way that people save money is by intentionally paying too much in taxes. To do this, they indicate a greater monthly tax requirement on the W-4 and 1040 forms than they actually have. That way, they don’t view savings as something that they can cut out, but rather a fundamental necessity: it’s just another tax. At the end of the year, they get a tax refund since they overpaid, and all that money goes straight to savings. This method builds accountability in the saving process.
Source: AP Photo/Mark Lennihan
At the end of the day, realizing that saving for emergencies like a downturn isn’t about how much money you make, but how well you manage it. Hopefully, some of the strategies in this chapter provide valuable insight into the actual management process.