A lot has been written about the financial impacts of Covid. I have even written a bit in this area. But today I want to explore something a bit more specific then I have seen elsewhere. The impacts of Covid on budgeting.
How I Budget in Normal Times
Before we proceed you might be curious how I budget during normal times. You can read about how I budget, or do not budget, here. Essentially I take a much more lax approach then many in the financial blogosphere. Instead of tracking finances by category I instead track my overall expenditures. Only if those expenditures get out of line do I bother with digging into categorization. Other then that I look for optimization opportunities consistently but not using categorization. It works for me, but there are many roads to managing your expenses.
Covid on Budgeting, The Monkey Wrench
But then Covid came… The problem here impacts basically all budget styles, even my lax one. You see, due to the lock downs the entire structure of our lives changed. No/reduced vacations, reduced children activities, reduced/no eating out, commute/business travel removed, and live entertainment eliminated to name a few. I am sure if you take a moment to think about it your life structure has changed just as much. Go ahead, I’ll wait while you give it a thought.
Now the problem is your budget is based on your life structure. Depending on what you do with your life, your expenditures follow. Unless you were a hermit before Covid, Covid thus majorly changed your expenditures.
Hard to Compare a Year of Budget on Covid to a Year Without
Therein lies the problem. All budgets are inherently based on comparison. That comparison most typically relates to a year on year comparison of expenditures. If overall expenditure, a given expenditure type, or whatever moves significantly in a given direction from a previous year then you know the impacts of an adjustment or a need to make an adjustment. But what happens when things change so much from one year to the next that the prior year is no longer a good example?
Traditionally Managing Changes with Budgets
We all have changes from year to year that change the baseline. Some are small due to items like typical amounts of inflation. Others have a larger impact: say a move to a new job, getting married, etc. Typically you would just look at your numbers, understand where your structure changed, and adjust for that change. You might even ask others who have had similar events how they adjusted. After that adjustment you could continue to manage your budget. After the first year when things stabilize you’d have a new baseline to operate against and validate your assumptions about the new normal.
Constant changes of Covid and the Impact on Budgeting
The problem with Covid are things are still evolving. From tax laws that are changing in real time, restrictions that pop in and out, and even the timing on when you will receive the vaccine. We have not established a new baseline and no one knows for sure where things go from here. No one alive has done this before. Who knows what things will look like post Covid?
What I have Done to Deal with the Impact of Covid on Budgeting
Which brings us to the part of the blog post where I tell you what I have done. But before I proceed I will caution that there are many ways to to solve for the impact of Covid on budgeting. Part of my hope is that others who budget can post their thoughts below in the comments on their approach. Between their thoughts and my own perhaps we all can benefit.
So how am I handling the Covid budgeting conundrum? Well there is one thing I have noticed with Covid for our household. Outside of the typical minor inflation adjustments, Covid’s impact on our budgets will all be downward, not upward. It’s about what we can’t spend money on during this period, not what we can.
Pre 2019 Budget as the High Water Estimate
So this information establishes a baseline. My 2019 pre Covid budget. We should not expect my expenditures to exceed our 2019 expenditures adjusted for inflation.
Add to that I have significant evidence our expenditure reductions should exceed any inflation adjustment. For example, we spent over 3K on vacation in 2019 after credit card churning. We spent 80 dollars in 2020 for a night at a campsite, and credit card churned for much more then those 80 dollars. I find it highly unlikely that inflation exceeded $3K dollars from 2019 to present for other areas of our budget. And my cost reductions were more then just vacation. As such my starting point is my exact expenditures in 2019.
Category Reductions Could be Used to Adjust for the Impact of Covid on Budgeting
Now I could have attempted to adjust down further using similar logic. I could take the amount I normally spend on things like live entertainment as another adjustment. From there I could work my way down to a new logical baseline of comparison that allows me to continue to optimize my financial well being. If that is your goal, I’d recommend you give it a try.
But here is the thing. We are in a pandemic. Our mental health is suffering as it is. We are in good financial shape, over Financial independence in fact. Our income is actually up from 2020. So essentially I gave myself permission to release the reigns a bit during the pandemic. So long as I stay under the 2019 guidelines I don’t sweat it. That means we continue to save the same amounts for our future. Sometimes financial optimization needs to take a back seat to mental well being.
It’s Not About Material Spending, It’s About Strategic Loosening of Expenditures
That doesn’t mean I’m splurging on material goods as a means of happiness. It is important to remember that never helps. But it does mean I increased expenditures on takeout, donations, and in home entertainment. All things that either help the community or help our sanity. The options I have built up during the boom years have allowed me to take that liberty with my finances.
We Still Undershot Our Expenses in 2020
If you read our review at the end of 2020 we still ended up a little light on operating expenditures. The extra just got booked to savings. If I have extra, unlike business or government, I don’t need to spend it to ensure I have that budget next year. So why would I? My budget is already set at a level that allows me to buy what I value. If I did not buy it during the year, why would I suddenly value it at the end?
I guess what I am saying is, our habits and values drive our expenditures more then our budget at this point. That should be the end goal for anyone that wants to further their financial position. As such not having a tightened budget didn’t really matter.
Large Expenditures Like a Travel Trailer
I know some of you are saying, but you bought a travel trailer, how does that play in? You after all bought it in 2020, but there was no similar expenditure in 2019.
Well, here is the deal. Note my wording, operating expenses. There are 2 very explicit expenditures, travel trailer and cars, that I view akin to the corporate equivalent of capital expenditures. I pay cash for them so they have little to no impact on what I spend year to year (ie no loan payments beyond the lump sum expenditure). Furthermore, they get used for 10 or more years. So outside their maintenance it would be unfair to account for them in any specific year of budgeting since their usage applies across many years.
They are also in my case necessary or an investment in reduction of future expenses. I don’t live somewhere that you can get around without a car. Uber doesn’t consistently work in a rural environment. I travel for pleasure all the time, and a campsite is way less expensive then a hotel. To be accurate their costs need to be spread over their expected life as part of my cost of living to take the place of the reductions. But that seems like too much work, so I don’t do it.
How I Control One Off Expenses
So they don’t fall into my 2020 budget or really any specific year. Now note that does not give me free reign to buy the most expensive item or buy new cars frequently.
What I really do is I wait until the item no longer fits our life. So for example the last time I changed cars after a decade it was because 3 kids would not fit into my existing car without being similar to a clown car. Ie. I replace capital items when there is a logical need to do so, not simply because I want the newest. There are those habits again…
Then to determine how much I can spend on my replacement, I look at my expected operating savings in that given year. If you recall that is typically 2x operating expenses. My budget for our capital expense then becomes some portion of that savings such that I still put a meaningful amount into savings for the year. Not very scientific but it works for us.
About That Travel Trailer
A note, in 2020 with the trailer it worked very well as that amount roughly equaled reduced operating expenditures and increased income. So I ended up saving the same as 2019 and still bought a trailer. The trailer arrived last week, and above is a picture of it. The first trip will be soon.
Anyway, that is what works for me. How are you managing Covid budgeting?