How to Disaster‐Proof Your Budget

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methods

1Tracking and Controlling Expenses

2Building an Emergency Fund

3Securing Documents and Information

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Many people are just a paycheck away from disaster. Unexpected expenses can take their toll, especially when you have limited income. To disaster-proof your budget, keep track of your bills and control your spending. Maintain adequate insurance and build an emergency fund so if disaster strikes you'll be able to weather any financial storm.

Steps

Method 1

Method 1 of 3:

Tracking and Controlling Expenses

1. 
   1
   Use a personal finance app to track expenses. Tracking expenses can be time-consuming. There are a number of personal finance apps you can download and connect to your bank account so your transactions are imported automatically.

   • Search online for personal finance apps and compare their features to find the one that will best suit your needs. Some are free, while others require a monthly subscription.
   • You'll still have to go through the transactions and make sure they're categorized correctly, but connecting your bank account saves you the grunt work of having to input everything manually.
   • Use the information about the money you actually spend to reconcile your budget at least once a month. By comparing your budgeted figures to what you actually spent, you can determine which categories need to be adjusted.
2. 
   2
   Estimate income conservatively. When creating your budget, base it on the least amount of income you could possibly make in a month. This should be net, or take-home, income after all taxes have been paid.

   • You may be able to set up your accounts so that only the budgeted amount of income is deposited, and any extra is automatically put into savings.
   • If you have several sources of income, list each source separately on your budget and then total them together. Don't include income that you don't intend to use for household budgeting, such as child support.
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3. 
   3
   Allocate your income among expense categories. To create a budget, you want to place your expenses into one of five basic categories: housing, transportation, debts, savings, and discretionary expenses.

   • Ideally, housing should take up around 30 percent of your budget and transportation around 20 percent. These bills and expenses should be a maximum of 50 percent of your income.
   • Allocate no more than 20 percent of your income to debt repayment (not including your mortgage or car payments). If the minimum payments for your debts come to more than 20 percent of your monthly income, talk to a credit counselor.
4. 
   4
   Try the envelope method. If you're having trouble controlling your spending, the envelope method can help you get on track and stay within your budget. Try it for a month if you find you keep blowing your budget.

   • Get an envelope for each expense category and write the amount of money you have budgeted for that category on the outside of the envelope.
   • You can try going full-cash so you can actually see the money being spent in each category, but if you pay a lot of your bills online this may not be possible. In that case, simply keep a record of transactions in that category in the envelope.
   • At the end of the month, see which envelopes have money left in them. If you came up short in other categories, you can move the money around. This shows you how you need to adjust your budget.
5. 
   5
   Pay down high-interest debts. High-interest debts can end up costing you a lot of money in the long-run, especially if you're only paying the minimum payment every month. Prioritize your debts and pay down those with the highest interest rate first.

   • You can't disaster-proof your budget without getting control of your debts. If something happens, missed payments and penalties can quickly add up.
   • For example, suppose you have three credit cards, and you have $300 a month that you can devote to credit card payments. Make the minimum payment on the two with the lowest interest rates, and devote the rest of the money to the one with the highest rate until you've paid it off.
6. 
   6
   Take a detailed home inventory. Your home inventory can help you control your expenses, and is essential for your homeowner's or renter's insurance. Take the time to inventory and photograph your possessions, and keep a copy of the document somewhere off-site.

   • For example, you can save a digital copy on a cloud server or email it to yourself or to a friend or loved one.
   • Include photos of your property along with a detailed description, including the year you bought it (to the best of your recollection). For electronics and appliances, include the make, model number, and serial number if there is one.
7. 
   7
   Review your insurance coverage each year. Costs go up from year to year, and what seemed like an adequate amount of insurance coverage when you first purchased your policy may no longer be enough.

   • If disaster strikes and you don't have adequate insurance coverage, you may find that your budget is blown or that you aren't able to replace something important.
   • You also want to make sure that if you have to file a claim, the deductible is an amount low enough that you can pay it without having to take money meant to go somewhere else.
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Method 2

Method 2 of 3:

Building an Emergency Fund

1. 
   1
   Total your critical living expenses. In the event of a natural or financial disaster, you need to have enough money saved so you can still pay your bills and other expenses. Write down everything that you spend money on in a usual month, like your rent, food, or car payment.

   • Include minimum payments you would have to make on any credit cards, unless your cards have some sort of emergency protection that would allow you to skip payments in the event of a disaster.
   • You also want to take insurance deductibles into account. In addition to monthly expenses, include the amount of each of your insurance deductibles in your emergency fund.
2. 
   2
   Open a savings account. You want to keep your emergency fund separate from your other money so that you don't accidentally deplete it. Make sure you open an account that would be available for you in the event of an emergency.

   • You don't want to keep your emergency fund in an online bank, because in some situations, such as natural disasters, you may not be able to access your account. This is also true with financial disasters, such as identify theft, when you may find yourself locked out of your accounts.
   • Look for an account with a bank that has a brick-and-mortar location near you. You'll stand a better chance of being able to access your funds in the event of an emergency.
3. 
   3
   Arrange automatic deposits. While you're still building your emergency fund, you'll want as much of your income as possible to go into this account so you can fund it as quickly as possible. The easiest way to do this is with automatic deposits.

   • For example, suppose your budget is based on you earning $500 a week. However, most weeks you bring home between $600 and $700. Transferring the amount over $500 into your emergency fund immediately will help you save the money more quickly.
   • Automatic deposits are easier if you open the account for your emergency fund in the same bank as your checking account, but it can still be done even if your account is in another bank. Talk to a customer service representative at your bank.
4. 
   4
   Save enough to cover your expenses for 3-6 months. If disaster strikes, you need to be able to take care of yourself while you get back on your feet. If you know your living expenses will be covered for several months, it can give you the peace of mind you need to get things sorted out.

   • Review the amount in your emergency fund every year, or whenever you have a drastic change in expenses.
   • For example, if your rent increases by $200, you would need to add a total of $1200 to your emergency fund if it is intended to cover six months' expenses.
5. 
   5
   Start small. Keeping back six months' expenses may be out of reach for you at this point in your life, especially if you have limited income or you're trying to pay off a lot of debt. If you can't commit to a full six months' expenses, even one month is better than nothing.

   • Having an emergency fund that only covers your expenses for one month won't disaster-proof your budget, but it will give you enough time to reassess and prioritize things.
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Method 3

Method 3 of 3:

Securing Documents and Information

1. 
   1
   Gather important documents. In the event of any disaster, you will need original identity and legal documents to re-establish your identity and gain access to services and assistance.

   • Government identification cards, passports, birth certificates, and the like should be kept together in a safe place.
   • You also need to safeguard ownership documents such as deeds and titles. Keep a list of important financial information such as account numbers, along usernames and passwords for online account access.
2. 
   2
   Make digital copies of important documents. For some identity documents, you'll need the original. However, much of the information can be saved in a digital file so you can access it in the event of a disaster.

   • Include information about your accounts, including the account number of your emergency fund.
   • Make multiple copies and keep them in multiple places so you or someone close to you always has access. For example, you might put the information on several thumb drives and keep one at home, one in your car, and one at your office. If something happens to any of those locations, there will still be a copy elsewhere.
   • At least one close friend or family member should know about the existence of the digital files and know how to access them if you are incapacitated. That way you know that if something happens to you, your bills will still be paid.
3. 
   3
   Build an emergency financial kit with important information. You may take it for granted that you have access to certain documents, information, and accounts. But some disasters can leave you stranded and unable to access the resources you have.

   • An emergency financial kit includes the information you'll need to access your funds as smoothly as possible in the event of a disaster.
   • Include information about your household, including the names and ages of everyone living with you. Keep a list of names and phone numbers that are important contacts in the event of an emergency, including local hospitals, fire and rescue, and law enforcement.
4. 
   4
   Store important documents in a safe or off-site. Ideally, you'll want to have a safe for important documents in your home that is fire-proof and water-proof. You also need copies somewhere else, since nothing is 100 percent secure.

   • If you have an attorney who keeps copies of your will or other important legal documents, have them keep copies of your financial information as well.
   • You also can use a safe deposit box at your bank or at a local post office. Keep keys on you and make sure at least one close friend or family member has a key as well.
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Expert Q&A

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• Question

  How do you budget money when you live paycheck-to-paycheck?

  

  Brian Stormont, CFP®
  Certified Financial Planner

  Brian Stormont is a Partner and Certified Financial Planner (CFP®) with Insight Wealth Strategies. With over ten years of experience, Brian specializes in retirement planning, investment planning, estate planning, and income taxes. He holds a BS in Finance and Marketing from the University of Denver. Brian also holds his Certified Fund Specialist (CFS), Series 7, Series 66, and Certified Financial Planner (CFP®) licenses.

  

  Brian Stormont, CFP®

  Certified Financial Planner

  Expert Answer

  It can be hard to find room in your budget to start a savings fund, especially if you're living paycheck-to-paycheck. However, if you sit down and honestly assess your budget, you'll likely find some areas where you can cut back on spending.

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• Question

  How do you make a budget to plan for emergencies?

  

  Brian Stormont, CFP®
  Certified Financial Planner

  Brian Stormont is a Partner and Certified Financial Planner (CFP®) with Insight Wealth Strategies. With over ten years of experience, Brian specializes in retirement planning, investment planning, estate planning, and income taxes. He holds a BS in Finance and Marketing from the University of Denver. Brian also holds his Certified Fund Specialist (CFS), Series 7, Series 66, and Certified Financial Planner (CFP®) licenses.

  

  Brian Stormont, CFP®

  Certified Financial Planner

  Expert Answer

  Sit down and calculate on a month-to-month basis what it takes for you to meet your expenses. Include things like your monthly rent, food, car payments, or any other expenses that won't go away in an emergency; however, don't include things like taxes or 401(k) savings. Then, try to set aside enough money to cover about 3-6 months of expenses in case there's an emergency.

  Thanks! We're glad this was helpful.
  Thank you for your feedback.
  If How.com.vn has helped you, please consider a small contribution to support us in helping more readers like you. We’re committed to providing the world with free how-to resources, and even $1 helps us in our mission.Support How.com.vn

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