Imposed Frugality

As I write this note Melbourne is in a state of quasi Coronavirus lockdown. People can still wander around, schools are open. As are most of the shops. However people are increasingly working from home and normally busy streets in the CBD are empty.

For those of us on the path to financial independence, or for those who’ve already achieved it, this historical event creates an opportunity to test some basic assumptions about how well our income stream holds up during a market collapse and recession. We can answer the previously theoretical question “what sort of emergency fund do I need?” under real circumstance. And also test what sort of survival spending we really need to get by.

When we forecast spending we’d normally create categories, such as food, housing, travel, leisure etc and estimate how much we plan to spend on each during a typical month. In other words we create a simple budget. During the Coronavirus lockdown this budget is going to look very different from normal. It will be a survival budget, dictated by the conditions that Coronavirus has imposed upon us. Any budget lines for travel can be zero’ed out for the next few months. It simply won’t be possible. Same for eating out. Why buy new clothes if you can barely leave the house? Petrol and public transport, close to $0. Leisure activities, the gym, yoga classes, concerts and sports events are all something we’ll be needing to budget for later in the year. Like it or not we’re all having frugality imposed upon us.

One of the few upsides of all this is that it gives us an unexpected opportunity to answer the question:

“if the worst were to happen then how much do I need to live?”

The worst has happened and now we get to find out.

In my particular case I’ve prepared a 2020 Coronavirus expenses budget that assumes no further travel. The budget has big cutbacks in leisure activities, transportation, dining out and a bunch of other categories. I’ve taken this through to the end of the year, which is pretty pessimistic, but the main point is to test what our household month to month spending will be during a situation like this. Now the challenge is to measure spending in the next few months to figure out whether these budgeting assumptions are accurate.

Why is this important and why is the current situation special? It’s important because knowing what your survival expense number is helps plan retirement during tough times. Most of us guess that we need $x each month and then assume that “well, if it gets really bad then we could probably survive on $y each month”. However, it takes a supreme effort of discipline to actually test what $y actually is under normal circumstances as it requires cutting right back for and pretending to live in a environment of imposed frugality. Right now we don’t need to pretend. It’s here. We can actually see how much it costs if we skip our morning takeaway coffee, miss all those gym classes, stop discretionary shopping and weekly restaurant visits. We have to do all this anyway.

So, for the next few months I’m going to try baking bread at home, practice yoga off Youtube and see how much we really need to get by when spending choices are so limited. I’ll track how much we spend and how long this lasts. This’ll help me understand what our expenses are and how much of a financial emergency fund we need to keep for next time something disastrous happens.

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