You Need a Bare-Bones Budget

How to create a budget for hard times.

Everyone needs a budget. Whether that’s the 50/30/20 budget, the envelope system or my favorite zero-based budget, a budget is a guideline you give yourself for how you will spend. This system should take into account both your financial needs as well as your values. It shouldn’t feel like punishment, and it shouldn’t hurt to implement.

But what do you do when financial disaster strikes, whether that be losing a job, a pay cut or becoming temporarily disabled?

The answer to this predicament is a bare-bones budget.

This is where we talk about the less-exciting and frankly, overdone part of personal finance: cutting stuff. But you need a bare-bones budget during tough times. And having a plan already in place for how you will restrict your spending to the bare minimum when needed will prepare you and reduce the pain when something goes wrong.

How to Create a Bare-Bones Budget

A bare-bones budget requires a few simple steps:

1. Create a Normal Budget

Before you can create a bare-bones budget, you need a budget for normal times. The easiest way to start is by tracking your actual expenses for a few months. This will give you an idea of where you’re starting from and what a normal month looks like for you.

2. Identify Necessary Expenses

Next, you should identify expenses you can’t cut. These are the things you can’t reasonably live without. Think health insurance, car insurance, groceries, rent/mortgage, etc. While you can’t get rid of these (although in some cases you may be able to reduce spending), it’s important to understand where your hands are tied.

3. Figure Out What to Cut

This is where you target the low-hanging fruit: streaming services, clothes (that you don’t need), expensive restaurants, vacations, etc. These things may bring a lot of enjoyment, but they won’t help you in a crisis.

You may also have to pause savings and retirement goals for a time while you stick to the absolute essentials. This is less than ideal, but obviously, your essentials come first.

It may be tempting to cut debt payments, but if it’s high-interest debt like a credit card, this will only hurt you more in the long run. Figure out how to keep making at least the minimum payments on your debt to avoid late fees.

4. Find Cost Savings

Finally, find some cost savings. These are areas in your budget that are necessary but where you can reasonably reduce your spending for a time. Grocery spending is an easy target here. You need to eat, but you don’t necessarily need name-brand items or steak.

Maybe you need clothes, but again, you probably don’t need name-brand clothes. Even some of your fixed expenses may offer some wiggle room. For example, you can increase your car insurance deductible to lower your monthly payment, as long as you can still meet this deductible in the event of an accident.

Other Considerations

Not everyone’s bare-bones budget will be equally restrictive. If you lose your job but your partner still has theirs, that gives you more room to spend closer to normal levels. And you don’t need to cut all non-essential expenses for a bare-bones budget to work. But creating this plan on paper (or in a Google Doc) prepares you for the worst.

A bare-bones budget is only meant to be temporary while you get out of the hole you’re in. Budgets are necessary, but they shouldn’t feel like you’re completely depriving yourself of what you enjoy.

There may be times you want to implement a bare-bones budget other than a dire financial situation. You might want to accelerate debt payments or you may have savings goals you want to reach sooner. But don’t treat it as a long-term plan. Money should be saved and invested for the future, but you should also enjoy it. Restricting your spending indefinitely can lead to a poorer relationship with your money.

A bare-bones budget can also help you stretch your emergency fund further. Let’s say you have 6 months of expenses in an emergency fund. If you can stretch your emergency fund to cover 8 months of expenses using a bare-bones budget, that will give you added security and buy you more time to ride out your financial situation.

Put Together Your Bare-Bones Budget

If you can put together a normal budget, you can put together a bare-bones budget. Even beyond the practical benefits, having a bare-bones budget can help you realize which expenses in your budget are really necessary and which you could live without in an emergency.

Like an emergency fund, a bare-bones budget is another layer in a robust financial plan that prepares you for most outcomes. Job losses or disabilities can happen to anyone, but having a plan in place can give you greater peace of mind and confidence in your ability to avoid financial distress.