Do I Need a Doomsday Budget?

Recession fears are going to continue into 2023 as more interest rate hikes cool the economy and reduce inflation. As economic growth slows, so will wage growth and hiring. There are signs that this is occurring already and that the leverage workers have had over the last two years to demand large raises and increased perks is coming to an end.

It has been a year of one money worry after the next and is easy to become overwhelmed by all of it. To feel confident about your finances during uncertainty, we recommend planning ahead. Two ways to do this are creating a doomsday budget, as well as eliminating all unnecessary debts like credit card debt.

Create a Doomsday Budget

To prepare yourself for a large drop in income, we recommend that you create a doomsday budget for your household. No one likes to think about getting laid off or freelance work drying up, but if you plan for it you will be ready if it happens. 

Let’s walk through a budgeting example. 

Say your regular expenses are $4,000 including all of your food costs, rent, subscriptions, shopping and student loan payments. If you were suddenly laid off, unemployment generally covers 40% to 45% of your salary.

What can you cut out of the expenses below to get to $2,000 of essential expenses?

Rent $1,500

Food $800

Car Loan $400

Cell Phone $150

Subscriptions $400

Shopping $750

Immediately dropping your subscriptions and shopping will get you halfway there. Should you also investigate a cheaper cell phone plan? Is there a way to stretch your food dollar through less takeout and more cooking?

Going through this exercise before you are actually in this situation will reduce your sense of panic if it does happen. If you want to monitor your spending on a regular basis, the Smart Sister Finance spend tracker is available in this post.

Eliminate Credit Card Debt

If a chunk of your income every month is also going to credit card debt, now is the time to prioritize paying off those cards. If you are in a doomsday budget situation, you want to be focused on essentials like food and housing, not allocating money to paying off last year’s vacation.

If you are carrying a monthly balance on a card that charges 18% interest, you are paying 18% more for each new purchase on that card, as well as interest on the rest of the balance. To stop this debt spiral with clients, Smart Sister Finance uses this debt reduction strategy: 1) Know Your Interest Rate, 2) Rank Your Cards, 3) Pick a Paydown Method.

Step 1: Know Your Interest Rate

Review the last statement for each of your cards and note the interest rate you are paying. This will generally be listed after your monthly activity and should be labeled “INTEREST CHARGES”

Step 2: Rank Your Cards

If you have more than one credit card with a balance, create a list for yourself of the outstanding amounts and interest rates for each.

Step 3: Pick a Paydown Method

Choose from one of the four options below to start paying off those cards!

 The Cash Flow Method of debt reduction focuses on paying off the debt with the largest monthly payment.

PRO: If you're already tight on cash, this offers the most relief.

The Avalanche Method involves paying the minimum due on all of your bills, and focusing all extra funds on the one with the highest interest rate.

PRO: Save money on interest payments.

The Debt Snowball method pays the minimum due on all debts, except the littlest one. You attack your smallest debt with a vengeance until it’s paid off.

PRO: This gives a quick victory and is perfect for people who enjoy checking things off their list.

With the Volcano Method of debt reduction, you attack whichever debt you hate the most (the one that makes you blow your top like a volcano!), without worrying about interest rates or balances.

PRO: This is very motivating because it brings you emotional relief once it’s paid in full.

Pick whichever method works for you so you can stick with it. If you don’t have a preference, go with Avalanche as you will save the most interest expense.

Need help reducing debt and getting financially organized?

Book a free coaching consultation with Smart Sister Finance.