Budgeting isn’t just about managing your finances; it’s about taking command of your life. Understanding where every dollar goes empowers you to navigate towards your long-term financial objectives. However, many budgeting efforts focus solely on the present, catering to your current income and lifestyle. While this approach suffices in stable circumstances, it falters when faced with sudden income changes. If you’re accustomed to living paycheck to paycheck, a sudden loss or reduction in income can prove catastrophic. This is where the concept of a “minimally viable” budget (MVB) becomes indispensable.
What exactly is a “minimally viable” budget? It represents the most elemental version of a budget, stripped down to the essentials. An MVB is a no-frills, worst-case scenario plan, designed to sustain you and your family through severe income disruptions. It extends beyond merely having an emergency fund; it entails a detailed strategy on how to utilize that fund and assesses its longevity.
Why is having an MVB crucial? Simply put, it helps mitigate panic and errors in times of crisis. None of us can predict when we might face a job loss or an inability to work. By devising an MVB in advance, you establish a clear plan—what expenses to retain, reduce, or eliminate—in the event of financial upheaval. Implementing a preconceived plan saves time, reduces stress, and facilitates sound decision-making during turbulent times.
Creating Your MVB:
- Identify Essential Expenses: Begin by determining the minimum amount required monthly to cover basic necessities:
- Keep: List fixed expenses, such as rent or mortgage payments, which remain constant and non-negotiable.
- Cut: Identify expenses that can be reduced, like groceries or utility bills, and estimate potential savings.
- Cancel: Eliminate non-essential expenses, such as subscriptions or memberships, to reduce costs further.
- Establish Savings Goals: With your MVB expenses outlined, set a savings target to sustain yourself during a financial crisis:
- Calculate the total monthly expenses under your MVB.
- Aim to accumulate an emergency fund covering these expenses for a period of at least three to six months.
Example: If your MVB expenses amount to $2,500 per month, your emergency fund should ideally range from $7,500 (three months) to $15,000 (six months) to provide a safety net.
- Explore Additional Income Streams: While the MVB assumes zero income, consider potential avenues to supplement your finances:
- Explore side hustles or part-time work to generate additional income.
- Factor in potential severance packages or unemployment benefits to bolster your financial resilience.
Having a well-defined MVB not only prepares you for the worst-case scenario but also enables you to strategize for improvement. While the focus remains on surviving without income, acknowledging potential income sources provides a more comprehensive approach to financial preparedness. By implementing an MVB and considering supplementary income options, you equip yourself with a robust strategy to weather financial storms effectively.