Jan 05, 2017

The Benefits of a "What If" Budget

By Jarrod Upton

We live in an uncertain world and change is inevitable. But most people have difficulty anticipating change in their lives and so often they are unprepared for it when it comes.

Of course, having a financial budget in place will help alleviate or accommodate any change that might arise. For most people, creating a budget (and sticking to it) is akin to dental surgery. It’s not an activity that ranks high on priority lists.

However, for those who take the time to create a budget, analyze their income and expenses and allocate accordingly in order to achieve short or long-term goals, life feels more secure.

But even the folks who routinely budget are seldom prepared for unexpected events in their lives. In fact, only 39% of American families surveyed report that they could come up with $2,000 if an unexpected need arose next month, according to American Family Financial Statistics.

Few people have a back-up plan or what I call a “what if” budget.

Preparing for Change

What if the circumstances in your life suddenly become radically different than what they are today?

There are myriad events that could conceivably occur that might have a major impact on your financial budget, and it’s not possible to prepare for all of them. But for most people, the likely scenarios to manifest are more familiar and common.

For example, let’s consider the following scenarios:

A father is the head of a household who lives in Texas. He has been planning for his daughter’s college education, putting money aside to help pay for those costs when the time comes. Part of his assumption was that she would attend a school in Texas, but “what if” his daughter gets accepted to an Ivy League school, say Harvard or Yale or Dartmouth? Now what? He certainly didn’t plan for the increased tuition costs or the additional travel expenses that would be incurred.

Let’s also consider what some Gen Xers (or what others refer to as the Sandwich Generation) are experiencing in their lives. Their parents are now of an age and time when one or both of them might need to move in with them. At the same time, their own kids might also be moving back into their homes, due to an inability to find work in their chosen fields. Three generations under the same roof and the Gen Xers are likely financially responsible for all of them.

When I meet people who are experiencing this phenomenon I ask, “Did you plan for this scenario?” and they almost always answer, “Of course not. We planned to travel, to retire early, to build a second home, but those things are unlikely to happen now.”

Another upsetting occurrence is job loss. In the event of being laid off or let go from your employer, how do you adjust or plan for that kind of scenario to ease the transition process?

If you’re a sole breadwinner, a good rule of thumb is to have 12 months of basic living expenses saved up. If there are two individuals in a household who are working, then there should be six months of expenses set aside to account for a possible job loss.

An Ounce of Prevention

These examples represent just a few of the possibilities that could occur, but if you examine your own life clearly and honestly with a willingness to anticipate and plan for future alternative scenarios, then having a “what if” budget in place could be valuable.

Consider constructing two budgets – one that represents their ideal or acceptable life and a back-up or contingency budget that plans for possible unexpected change. And for people who are willing to follow a budget,

I recommend these resources - Excel for Budgets, Mint.com, or Pearbudget.com.

As I mentioned earlier, I realize that most people do not like to make or stick to a typical household budget, and so asking them to create a second budget is even more egregious.

But as Ben Franklin aptly pointed out, “An ounce of prevention is worth a pound of cure.”

Jarrod Upton

Jarrod Upton

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