Budget Tips for Planning for Life's Unexpected Curve Balls

Life doesn’t always go as planned, and many of life’s major events, like getting married, having a baby and buying a home can crowd out your saving’s capability and even throw you into a financial tailspin.

When it comes to making ends meet, retirement is often left out of the savings equation. Eighty-four percent of people say saving for retirement has been undercut by a life event, according to this year’s HSBC Future of Retirement survey of more than 15,000 people. But people react differently when in crunch mode, the survey says, and in some cases, extreme measures are required to cover budget needs.

While 25% of people say they would look for better paying work if they needed more income, 21% say they would sell their valuables.

Increasing income through a better-paying job can be tough to accomplish in the current labor market, and selling valuables might provide a one-time cash injection, but it shouldn’t be viewed as a long-term, steady cash flow, says Barbara O’Neill, financial resource management specialist with Rutgers Cooperative Extension.

Three tactics improve cash flow in a financial crunch, she says: increase income, decrease expenses or a combination of them both.

Time to Downsize?

In reality, you have more control on your spend side, particularly with flexible expenses like travel, entertainment, gifts and food, says O’Neill. But if your financial woes seem irreversible, you may have to take a hammer to large expenses like housing.

In fact, 21% of women surveyed say they would downsize, compared to only 14% of men. And 31% of men say they would dip into their retirement savings to cover unexpected expenses.

Though experts concede downsizing may be extremely emotional, it’s more preferable than taking a chunk out of retirement savings. Actually, 29% of respondents say the financial strain of home ownership puts a real crimp in retirement savings.

Moving into a smaller house or a rental apartment potentially frees up money beyond monthly payments, says Joe D’Alessio, premier mortgage consultant at HSBC. What you save in property taxes, insurance and home maintenance and repair means you can start contributing or adding more money to your 401(k).

“A house is a powerful retirement vehicle that allows consumers to build up equity over time, but it shouldn’t rest on its laurels,” claims D’Alessio. When house-hunting, consumers often get caught up in the excitement of the moment. “They see a ‘perfect’ house and give little thought to the extras that go into it or the need for a savings fallback in the event of an unexpected, urgent situation.”

Rethink Your Lifestyle

Today’s lifestyle norms may have something to do with one-dimensional thinking. Items once seen as luxuries are now seen as necessities, says Ravi Dhar, director of the Yale Center for Customer Insights.

Plus, what people do with their money has more to do with psychological and emotional issues than it does with crunching the numbers, claims Marcee Yager, a retired certified financial planner. “It’s never just about the money.”

Because non-financial issues often dictate financial decisions and create a domino effect, consumers need to look at both quantitative (intellectual) and qualitative (emotional) issues when making life choices, says Yager. “Without shared thinking, [people’s] heads start spinning.”  

The idea that emotional understanding must be factored into financial decisions has gained very little traction, claims Yager. “Big investment banks don’t tend to make things soft and fuzzy.”

Dhar even questions the effectiveness of some system resources like the many online investment tools available to consumers. Calculators project four- six- or eight million dollar targets for a retirement 30 years into the future. He says the timeframe seems intangible and the goals unattainable.

D’Alessio recommends a deep dive into a person’s entire financial picture, including life objectives and present and projected future needs: the constancy of two-incomes, increased taxes, money for a landscaper to prune the bushes or cut the lawn and the expense of repairing a broken furnace or a dilapidated old water heater.

Prospective buyers may be preapproved for a mortgage, claims D’Alessio. “But the approval process does not tell the whole story.”

For consumers looking to navigate their way out or steer clear of the financial weeds, experts offer the following:

Take small steps to wealth. The only way to build up reserves is to do it gradually. O’Neill recommends budgeting a realistic portion of your paycheck to start an emergency fund at credit union.

Or, return to the basics. “The best thing people raising families can do is go back to the old traditional practice of putting money in an envelope or a cookie jar, adds Yager.

Be flexible. Think about what’s possible to mitigate a tight financial situation. Baby boomers tend to be fearful of change, particularly of moving to unknown places, says Yager. In fact, new locales both in and outside of U.S. borders can create wonderful opportunities that improve your quality of life.

Keep a minimum three-month reserve for savings. “People’s eyes glaze over when I tell them this, but it’s imperative,” advises O’Neill. Learn to cut corners, live on less and shop in cheaper places.

Write it down. You really need a formal plan, claims O’Neill. Take a financial fitness quiz then put your pencil to paper. You need to see the numbers then monitor your day-to-day situation.

Turn to professionals. Reviewing your saving situation and retirement potential with a professional financial adviser can help to ensure that all your future requirements are identified. If fees with an investment firm are too steep, some nonprofits and/or universities also provide financial advisement services. “Whatever route you choose,” says D’Alessio, “make sure you stick to it.”