How to Create a “Minimum Viable” Budget (and Why You Should Do It)
Making a budget is an important part of taking control of your life. Knowing where your money is going means you can start steering your financial ship towards your long-term goals. But most budgeting efforts are entirely focused on the here and now, working with your current income and lifestyle. And that’s okay if your current income and lifestyle don’t change dramatically. But what happens if you suddenly lose your income ? If you’ve created a budget that is a triumph of paying bills on time and living paycheck to paycheck, a sudden loss or reduction in income can be catastrophic. What’s needed is a “minimum viable” budget, and you need to create it now before you need it.
What is a “minimum viable” budget?
The term “minimally viable” refers to the most stripped-down, basic version of something. A minimum viable budget (MVB) is the most stripped-down basic budget you can live on. This is a no-frills, worst-case scenario budget that requires the least amount of money each month to keep you and your family housed, fed, and healthy in the event of a catastrophic loss of income. This is more than just creating an emergency fund —it’s a plan for how to use that emergency fund and a way to know how long that emergency fund can last.
Having an MVB is critical because it helps avoid panic and mistakes in the event of a disaster. We cannot always predict when we will be fired or become incapacitated for some reason. By developing an MVB before a disaster strikes, you’ll have a plan—what to keep, cut, or eliminate—in the event of job loss or other financial problems, so you won’t waste time. Being able to apply a plan you’ve already developed will save you time and stress and allow you to make better decisions in times of turmoil.
At worst
Setting up MVB is simple:
Step 1: Decide what to keep, cut, or discard. Start by determining the smallest amount of money you need per month to literally keep the lights on:
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Hold. List your fixed expenses, numbers that are the same every month and that you may not be able to change, such as rent or mortgage. Don’t forget about the possibility of new ongoing costs—for example, if you lose your health insurance, you’ll need to know how much it will cost you to buy your own insurance.
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Cut. Then make a list of all the expenses you can’t eliminate but can cut , and estimate how much you can cut them. You may be able to cut your grocery bills by 25% or reduce your utility bills by adjusting your thermostat or other strategies.
You should consider the possibility that you may be able to adjust or pause your debt payments by calling your bank or other creditors (including your mortgage), which could move them from the “save” to the “reduce” category, at least temporarily. It may be worth creating two versions of your MVB: one in which you successfully reduce or suspend debt, and one in which you do not.
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Cancel. Determine which expenses you don’t need. Be brutal —the key word in “minimum viable budget” is “minimal.” This means giving up everything you don’t need – streaming platforms, gym memberships, subscriptions, etc. This will of course depend on your personal situation. You may be paying for multiple phones or vehicles, but you can get away with just one. The key is to look at all your monthly expenses and assess whether you can live without them. If the answer is yes (regardless of your desire), add it to your “cancel” list.
Once you’ve determined what you’ll keep, cut, and eliminate in the event of a financial disaster, add it all up. The result is the absolute smallest amount of money you need to survive each month. Of course, this will be a rough estimate, but you can work with this figure.
Step 2: Set a savings goal.
Now you know how much money you need per month to live. When using MVB, you should start with the worst-case scenario, which is zero income. So, your next step is to make sure your emergency fund is large enough to cover you for a significant period of time. It takes people an average of three to six months to find a new job, so your emergency fund should cover your MVB for at least three months.
Let’s say you’re single and your average monthly expenses are $3,693 , but you can bring that down to $2,500 in MVB by saving, cutting, and canceling your subscription. So your emergency fund goal is at least $7,500 for three months of survival and $15,000 for six months, giving you a little more breathing room. By determining your MVB, you’ll also immediately know how long you’ll have to work if you lose income—if you get laid off and only have $4,000 in your savings account, you know you have about a month and a half. expenses before you get into trouble. This is not good news, but if you are clear about your situation, you can plan accordingly and take the necessary steps immediately.
Step 3: Additional Income
Now that you know your minimum spending and have a savings plan designed to give you some time, think about how you could improve the situation. This is not officially part of the MVB, which should remain a worst-case budget (and the worst-case scenario involves no income), but part of the plan is knowing what steps you can take. This includes conservatively estimating any positive aspects of income you can add to your financial Armageddon, such as:
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Side hustles that you can rely on or start to earn at least some money. Again, this is not part of the official MVB, but it’s good to have some plans in place so you can start generating extra income immediately and then adjust your MVB as needed to reflect unexpected income.
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Severance pay and other potentially mitigating factors. If your job terminates you, they may offer a package that will extend your health insurance or give you a lump sum payment, and these numbers can make a significant difference to your MVB.
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Unemployment. Know in advance how to apply for unemployment benefits and have an understanding of what those benefits may be. But keep in mind that unemployment claims can take a while to be processed and paid out, so you may have to count on a lower MVB for a while.