How To Create a Budget When You Can’t Pay Your Bills

When you’re struggling to pay your bills, the thought of creating a budget may feel like a waste of time. But that is exactly why you need a bare-bones budget in your arsenal to help you get back on track when you’re experiencing a financial crisis.

A New Type of Budget

A bare-bones budget is basically your regular monthly budget stripped down to include only the most essential of expenses and created for the purpose of freeing up additional income and being able to live on less.

Why Create a Bare-Bones Budget?

Once created, a bare-bones budget shows you the least amount of money you would require to survive on a monthly basis. This is a good number to be aware of and gives you a baseline of where to start.  You will then be able to prioritize the rest of your expenses according to how much money you have remaining.

Your Main Priorities

Anyone should be able to take a look at your budget and immediately see what you value and prioritize in life. When facing a financial crisis, you are forced to be even more intentional about how you are spending your money. The first way to do this is by cutting all unnecessary spending which means prioritizing your spending first on the absolute necessities.

This is a great place to begin narrowing your focus on necessary spending and determining where you’re able to make changes to free up the extra income you need during this uncertain time.

Food

This is pretty self-explanatory, as we all need food to eat, so you must prioritize food first in your budget to make sure that you and your family are healthy and well-fed.

This does mean spending on the basic staples and ingredients to make home-cooked meals. This does not mean take-out 5-nights a week and dining at fancy restaurants.

Shelter

These expenses would include mortgage or rent payments, property taxes, PMI insurance, homeowners insurance, and the like. These types of expenses would not include buying new furniture or updating your landscaping.

Utilities

Be sure to prioritize all utility payments needed to maintain a safe environment in your home and comfortable living conditions for you and your family.

Essential utility payments would include electricity, natural gas, water, sewer, etc. but would not include things like cable or streaming services.

Transportation

Basic transportation, that is. Since your transportation must be safe and reliable, this could mean fixing a recent flat tire, daily bus fare, or even purchasing a new-to-you reliable vehicle that will not break down and leave you stranded on the freeway. If you are operating a vehicle, then auto insurance would also be considered an essential transportation expense.

This would not mean leasing a new luxury vehicle or upgrading your sound system.

Cut Your Expenses

Once you’ve covered your necessities, it’s time to take a look at your remaining fixed expenses, which will include any other bills or expenses you pay on a monthly basis – things like debt payments you make, cell phone bills, insurance premiums, etc.

Determine which fixed expenses are more important to pay than others. Consider making a list and numbering them based on priority.

Prioritize Fixed Expenses

Maybe your cell phone is a high priority to you, and maybe you haven’t used your gym membership in the past few months. It would make sense to cancel the gym membership so you can put that extra money towards paying your cell phone bill.

Go through each expense and identify opportunities to cut low-priority expenses. Remember, personal finance is personal, so this is up to you alone or you and your spouse/partner to determine in what order your money is prioritized.

Rinse and Repeat

After you’ve reviewed all your fixed expenses, apply the same process to your variable expenses – things like groceries, fun money, entertainment, restaurants, personal money, and more.

Following the same process, determine which budget categories you can decrease or eliminate altogether, freeing more room in your budget to carry you through tough times.

Group Your Budget Categories

Another option is to group your expenses into tiers according to their priority. When money starts to get tight, you could automatically go to your budget and cut the Tier 3 expenses. If things worsen, you can easily cut Tier 2, leaving only Tier 1, which would include the expenses within the four walls of budgeting.

This approach tends to work well because it’s automatic. You have already pre-prioritized all of your expenses and budget categories, so you can easily cut those expenses without having to put much thought or emotion into it, which is extra helpful when you’re in an already stressful situation.

Cash Envelopes

If you are a cash envelope system user, that can prove an easy way to slash your spending and show you what to include in your bare-bones budget.

Simply go through your cash envelopes and determine which envelope requires a deposit each paycheck and which does not – this may change each payday depending on your particular system.

Sinking Funds

This is an easy way to address your expenses from paycheck to paycheck or month to month (depending on how you budget), and you can use the same approach with any sinking funds you may have.

Contributing to a Christmas sinking fund or a vacation sinking fund may be extra luxuries you can’t afford when facing times of financial insecurity. As things become more stable, you can resume contributing to those accounts as you see fit.

Pause Your Debt Snowball

Are you currently using the debt snowball system, debt avalanche system, or some other debt payoff method? This is a good time to “press pause” and stop paying any extra money to debt. Be sure to continue making the minimum payments to avoid any late fees or penalties. You may be able to free up a substantial amount of money by making only your minimum payments until things aren’t so strained.

If you are unable to afford your minimum payments, be sure to contact your creditors and make them aware of the situation. Most companies are willing to work with you in some capacity if you communicate your situation to them.

Stop Investment Contributions

As a last-ditch effort, if things are getting really bad, consider stopping any retirement or investment contributions you make.

Do not withdraw money from any retirement accounts if you’re not of age since you will be penalized but stop making the deposits into those accounts for the time being.

Save as Much as Possible

After completing all of these steps to lower your monthly expenses, free up extra cash and create a bare-bones budget, the best thing to do is save as much money as possible. If you already have an emergency fund, consider increasing it. You can never be too prepared for a job loss or a medical emergency.

If you do not have an emergency fund, now is the time to save as much money as possible to protect your family and your finances and keep you from going into debt (or into more debt).

Emergency Funds

A good rule of thumb is to save three to six months of living expenses (add up all your necessary expenses and multiply).  I used to think three months were great, but with everything going on in our world right now, six months sounds way safer.

Moving it to a separate bank, or better yet, an online bank, is a great way to keep it out of sight and out of mind.  We love Capital One and have used it for over a decade.

A New Normal?

Once your finances rebound, you may be surprised with how little you were able to live on during financially stressful times.

Maybe you will decide to loosen the reigns back up and start living on your regular monthly budget again.

Maybe you’ll decide to stick with your emergency budget and continue to use that extra money to achieve your financial goals even faster.

Or maybe you’ll land somewhere in the middle!  Either way, seeing the power you have to manipulate your budget to serve your current needs is a great lesson in personal finance.

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