Spending Smart: How To Implement Spending Triage

Quoted in Chicago Tribune, Hartford Courant, The Morning Call and Newsday (11.30.08)
Spending Smart: How To Implement Spending Triage
By Gregory Karp

Triage is crisis management: prioritizing care to wounded patients in an emergency based on severity of injury and likelihood of survival, for example. It’s a way of allocating limited resources to minimize casualties.

Spending triage is similar: prioritizing your dollars in a logical way. With companies announcing job layoffs by the tens of thousands, many households will need to perform spending triage.

Most advice about layoffs centers on how to land another job, so you can start the flow of income again. That’s important and truly addresses the root of the problem.

But in the short term, the priority is to stay afloat financially. You do that by attacking the spending side of your budget.

Here’s how to leap into spending-triage mode.

Act quickly and decisively: The time to perform spending triage is the moment you arrive home.

The emotional pain of a job loss involves loss of control and certainty. By taking swift action on spending, you regain some control.

Develop a sense of urgency: The first hour after arriving home might involve a round of phone calls.

Fitness club membership? Canceled. Videos-by-mail subscription? History.

Go through a recent credit card or debit card statement and brutally cut recurring spending that’s the least bit optional.

Define needs and wants: List your needs versus wants in columns on paper, said Susan Beacham, chief executive and founder of Money Savvy Generation and co-author of “The Millionaire Kids Club.”

“Once you know the difference between need and want spending, it’s time to cut all wants for now, not forever, just for now,” she said.

Perform zero-based budgeting: Household spending can become sloppy during flush times.

Zero-based budgeting is different. All spending, the category and the amount, has to be rejustified, said Clint Edgington, president of Beacon Hill Investment Advisory, a wealth-management firm in Arlington Heights.

It’s about building up your expenses from zero, rather than cutting down expenses from current levels.

Tap savings: If you have an emergency fund, now is the time to tap it. This is an emergency.

Maintain your four pillars: Food, shelter, utilities and transportation are your immediate pillar priorities. You also could add insurances, especially health insurance.

Avoid borrowing: As long as you can, try not to borrow money, especially from high-rate credit cards. Withdraw money from retirement plans only to avoid bankruptcy.

Evaluate the car: If the loss of a job is likely to last a long time, you might have to make some difficult decisions, such as selling automobiles and using less-expensive ones, and moving your residence to a cheaper house or apartment. What if you haven’t been laid off yet but are in danger? Similar rules apply. Your priority is to pile up cash and cut money obligations, which include paying down debt.