Contingency Budgeting: Low, Medium, and High

Husband and wife paying bills on computer.Have you ever made a contingency budget- a plan for how you would pay your bills if you suddenly lost your income or how you would handle an unexpected windfall of cash? Have you even created a household budget for your current expenses?

It can be beneficial to have a strategy in place for all three of these contingencies- or, as we’ll call them, a low, medium, and high budget.

Let’s start on the low end and work our way up.

The Low Budget.

Figure out your “low budget” by stripping everything away and breaking it down to the bare bones. Don’t think long term, just ask yourself, what can I live without for a month?

It’s amazing how many of the expenses we’ve come to think of as necessary fall away when we only consider sacrificing them for a short period of time. Our habits and justifications for spending become so rooted within us that we forget that we chose them and that there are other options available. The low budget is all about breaking those habits and putting new, constructive ones in place.

Once you’ve identified the cost of your true necessities (housing, transportation, food, etc), you’ll know how much you income you need to bring in at a minimum. If you’re not hitting that minimum income threshold, even with your “low” budget, you need to either take on more work, ask for a raise, or find ways of reducing the cost of your necessities.

You cannot spend money you aren’t committed to making. If you create the habit of spending more than you can bring in on the low budget, you’ll always find ways to spend more, even as your income increases.

The Medium Budget.

Your medium budget is based on your current income and expenses. Hopefully you already have a system in place that divides everything you make into categorical spending limits, covering your basic expenses, your occasional splurges, and your pay day to yourself for future savings and investment goals.

This budget is not about restricting yourself, on the contrary, it’s about freedom. When you create a financial plan for your current circumstances, you ensure that cash is being designated according to your priorities.

Set goals for the things you want and include the savings you need to reach those goals as a line item in your budget. For instance, if you want to pay for your kids to go to college or to remodel your home, start designating a portion of each month’s budget for that objective.

When you focus on the goals beyond paying your rent and keeping the lights on, your budget goes from a “restriction”, to a roadmap to achieving your ideal financial future. Speaking of an ideal financial future…

The High Budget.

Creating your high budget is a fun exercise for bringing clarity to your big goals and dreams. When you identify how you would use your increased cash flow, you are starting to create that reality for yourself– it’s a positive affirmation in action. If you don’t have a reason to spend money, you won’t have a reason to make it.

Think of your high budget as your financial dream board- vacations, experiences, etc. Those dreams will become your reasons to start saving NOW.

Notice that the word “budget” never goes away, regardless of low, medium, or high income levels. Even the luxurious expenses and splurges require a plan to ensure that spending never exceeds income. Excess cash without a plan or purpose disappears. Need proof? Just look at the sad fates of past lotto winners- broke again just a few years later.

If you spend more than you make, you’re always going to be broke, regardless of your income or other cash influxes. You may be broke at a higher level, but you’re still broke.

Have you ever made a contingency budget for the “low” and “high” occasions?


Contingency Budgeting: Low, Medium, and High — 13 Comments

  1. I’m self-employed and we do have a bare bones budget that we could turn to if my income dropped off. Our regular budget is basically a “medium” budget. I’m staying away from the high budget! =)

    • I generally fluctuate between my low and medium budgets, but I dream of the high just to have something to achieve.

  2. We never really thought of contingency budgeting in three tiers like that. Ours lines up most with medium I suppose, and if crap ever hit the fan we would stretch that medium by stripping down to essentials. I do see what you mean with the positive affirmation. Anneli is always looking for that next big thing to motivate her to work hard. Seriously, we can just get back from a vacation and she wants to know where we are going next before we are home from the airport haha.

    • I know the feeling! I literally got back from my vacation yesterday and I’m already thinking about what I should do next. I think you have to have something to look forward to so you’re working towards it.

  3. I calculate our Low budget, which pays the bare necessities, once a year, in order to keep our emergency fund at the correct size. I also keep a running tally of our current budget. I guess that’s our Medium budget. We don’t really try all that hard to stick to a budget, though. As long as my wife and I agree on our savings and expenditures, which is pretty much all the time, we are both happy.

    • As long as your happiness isn’t derived from constant “high budget” living beyond your means, I think you’re safe 🙂

  4. There are three types of people. Type 1 tries to live within their means and cut back on spending. Type 2 accepts to work harder and longer in order to increase his/her standard of living. Type 3 is the clueless type who thinks credit cards are their best friend and won’t get to the grips until it is too late. You need to choose which type you are going to be. Great article, thanks.

  5. This is SMART. I never considered having three separate budgets. I’m trying to really bulk up our savings so I may try going with the bare minimum to save more. Something to really consider. Great piece!

    • You can even find a middle ground between the low and the medium if you want to bulk up the savings without cutting out EVERYTHING. Good luck Taylor!

  6. Yep, this is exactly what we did (I did) when we were in debt. We had a thing called ‘survival budget’ and this was the absolute minimum on which we could live (under certain conditions which included keeping the house). It turned out to be very useful psychologically thought we never had to live on our survival budget. We lived on our ‘optimal’ budget and now that we are debt free we continue doing that.

    • “Survival Budget” is a good name for it, self explanatory- what you need to survive.

  7. Good way to look at budgets. I guess we’re in the Low-Medium range, given that I haven’t cut my cable yet. Eeeek 😮

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