How to Budget for 2021

Budgeting for 2021 Amid Uncertainty

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Budgeting for a new year always involves a degree of uncertainty. However, budgeting for 2021 in the midst of a pandemic may be particularly challenging. Everything feels so unpredictable, but a budget will provide a degree of consistency and can help guide your spending and saving habits.

Here’s what you need to know to get started.

What Should We Prepare for in 2021?

From a financial perspective, consumers should approach 2021 cautiously because there is still so much uncertainty. For many people, this entails a streamlined approach to spending. In fact, Jake Loescher, CFP, and financial advisor at Savant Wealth Management in Rockford, Illinois, predicts that the new year probably will be comparable to 2020. “Given the high likelihood of vaccines not being widely distributed until the second half of the year for most adults, individuals should prepare for very similar budget constraints,” he told The Balance by email. 

Government assistance may lack the depth needed to provide meaningful changes. The first round of stimulus checks in early 2020 provided $1,200 to single taxpayers, $2,400 for married couples, and $500 for children. However, the median rent in the U.S. is approximately $1,062, so that one-time payout was unlikely to make a big difference. 

In December, Congress and President Donald Trump passed another economic relief package that will give many Americans up to $600 in one-time stimulus payments (with an additional $600 per eligible child). “To the extent further stimulus becomes widely available, individuals would be wise to build up their emergency fund if dollars aren’t needed for immediate expenses,” Loescher advised.

Many unemployed Americans also received $600 per week in supplemental unemployment aid until July 31, which did make a difference. However, for people budgeting for long-term unemployment, it is unlikely that the expected additional $300 per week from the second round of federal unemployment help will be sufficient. 

The unemployment rate stood at 6.7% for November 2020, according to the Bureau of Labor Statistics (BLS).  Although it has been steadily falling since the pandemic broke out in the spring, the rate’s level could provide a falsely optimistic view. 

“Millions have exited the labor force and labor force participation is down substantially from where it was in February,” explained Adem Selita, CEO and co-founder of The Debt Relief Co. in New York. “So the unemployment rate is not showing the full impact of our current recession, and there are millions of people that are now considered to be long-term unemployed and are not being factored into unemployment data,” he told The Balance by email. 

Both Selita and Loescher believe that some workers could be in for an unpleasant surprise. 

“Depending on legislation that is passed by the Biden administration and how [work from home] WFH employment continues—companies want to lower pay depending on your state of residence—it is possible that wages decrease, depending on your industry, if Biden and Congress increase the corporate tax rate,” Selita said.

In addition to companies laying workers off, some are moving toward insolvency. “If this occurs, American workers may see an impact to their earning potential and financial security,” Debt Relief Co. CEO Selita warned. 

How Else Could the Pandemic Affect Your Budget?

Lockdowns and social distancing guidelines have affected most people. Your 2020 budget may have changed for the better—or the worse—as you adopted new habits in the age of COVID-19. 

“Many consumers are spending much less on ‘services’ and ‘experiences’ and are instead opting for in-home entertainment and ‘product’-based consumption/spending,” Selita said. In other words, if you had a habit of eating out, going to bars, athletic events, and movie theaters regularly, you’ve probably noticed savings. 

And if you work from home, your transportation, clothing, and dry-cleaning costs have likely decreased significantly. Plus, eating at home is usually much cheaper. On the other hand, your utility bills may have increased. In addition, research shows that consumers are spending more on household cleaners and soap, vitamins and supplements, and coffee. People with kids may have the added expense of creating a home learning center with computers, desks, chairs, and school supplies. 

“Depending on your particular situation and employment, net-net, working from home could be a cash flow-positive for you and may allow you to reduce monthly expenditures,” Selita said. “If you fit this bill and are a disciplined budgeter, you can definitely use this to your advantage and try to take any additional savings to invest for the future, whether it is via equities, cryptocurrencies, bonds, real estate, etc.” 

On the other hand, if you’ve experienced an increase in expenses or a decrease in income, he warns that your priority must be evaluating the opportunity cost of your money. 

“The last thing you want to do is to head into 2021 with outsized credit card debt and personal loans and then have student loan deferment expire,” Selita said. “If you have any type of deferment—whether it’s mortgage payments, student loans, etc.—you do not want these bills to catch you by surprise in 2021.”

What Budgeting Strategies Can You Use in 2021?

Even though the pandemic has created a high level of ambiguity, don’t panic. There’s always some uncertainty when planning for the future, according to Dr. David Tuyo, CEO of University Credit Union in Los Angeles, California, and co-founder of the Advanced Lending Institute. 

Financial experts say what’s important is to build a framework and stay the course.   

One of these approaches could help you craft a budget that fits the unpredictable year ahead.

‘BOP’ Methodology

“The first step should be to make a cash-flow statement to understand what’s coming in and what’s going out,” Tuyo told The Balance by email. Then, he recommends that you pay yourself (savings).  “The next step would be to address uncertainty, and increasing your understanding of the cash-flow statement allows for a quick and easy approach to scenario planning.”  

Tuyo recommends a simplified budgeting approach using a “BOP” methodology, an acronym for the following steps. 

  • B: Create a base case, which is the original cash-flow statement
  • O: Create an optimistic case, which would assume a recovering economy and a pathway toward a return to normal
  • P: Create a pessimistic case, which would assume similar or increased restrictions with economic effects

50/30/20 Rule

The 50/30/20 rule is another simple budget method that focuses on needs, wants, and savings. “It suggests that half of your income should go towards your essential needs like food, housing, insurance, bills, etc.,” said Norm Champ, partner in the Investment Funds Group at Kirkland & Ellis in New York, New York, and author of “Mastering Money.” 

“The other half of your money is allocated to your wants and savings, or paying off debt.”  Champ told The Balance by email that 30% of your income can be used on discretionary spending. “The final 20% should be allocated to paying down debt or building up savings to help you with your long-term financial goals.” He finds that this formula is popular among people who tend not to like restrictive budgets. 

Gamifying Your Budget 

Yet another option is to gamify your budget. Selita said he has seen a high success rate with consumers who use this approach because it’s fun and competitive. 

“Ideally, you should set up a monthly benchmark for your expenses, and try to surpass it every month,” he explained. “Although outlier months like December (with excess holiday shopping) may not be the best month to use as a benchmark,” according to Selita. 

Using Budgeting Software

To stay on track, you might want to consider budget-tracking software. Loescher recommended Mint.com or YNAB, short for You Need a Budget. After you identify how much money is coming in and going out, he suggested identifying savings goals. “Beyond this, ensuring that there is accounting for one-time expenses that don’t always fit the monthly mold, like property tax or car insurance, will help to avoid ‘trouble months.’ ”

One major mistake he sees is allocating every single dollar for an expense. “Having cash left over each month gives flexibility for unexpected expenses and allows for months where extra dollars are available for further savings or discretionary expenses,” Loescher said.