Budgeting is a key financial action when it comes to building wealth. Your budget helps to guide your spending and saving decisions and basically helps you stay on track with your financial goals.
"It's important to keep in mind that certain situations might require you to review your budget in detail or even completely overhaul it."
As you get comfortable with creating a new budget in advance of every new month (because no two months are alike), it's important to keep in mind that certain situations might require you to review your budget in detail or even completely overhaul it and in this post, I'm highlighting some of those specific situations.
When to review your budget in detail:
1. When you pay off your debt
Reviewing your budget after you pay off your debt is really important because after your debt is paid off, you will free up a good amount of money that was previously going to your debt repayment and you want to make sure that you repurpose those funds properly. The last thing you want is for that money to slip away unaccounted for.
Some ideas to repurpose those funds include:
- Retirement savings
- Savings towards a short or mid-term goal e.g. buying a house or car
- Saving for your child's college education
2. When you purchase a home
Buying a house means big changes to your personal finances and it definitely requires you to review your budget in detail. For one thing, it's important to expand your emergency savings to include inevitable home repairs or home warranty/insurance payments.
You also want to accommodate things like grass cutting and snow removal into your budget and if you know you have a major repair or replacement coming along down the line e.g. a roof replacement, air conditioning replacement etc, then you want to make sure you also build monthly savings towards these items into your budget as well.
3. When you get married
Getting married could mean managing your finances jointly and at the very least, it means paying household bills together and planning for / saving for joint goals. While the way each couple manages their finances is unique to them, it's important that you work alongside your spouse to create a budget each month that works for your financial style as a couple.
4. When you move to a new city
Moving to a new city is most likely to impact most if not all of your living expenses which could be lower or higher depending on where you are moving to/from so you definitely want to take a closer look at your budget when you are making this change. In addition, it's important that you plan for the expenses around the actual move by building the savings for your move into your budget.
These savings include rental trucks, plane tickets, new furniture or new appliances etc. Moving cities can get expensive, even when you are moving to a cheaper city. So lay out all your potential costs and build them into your budget.
5. If you lose your job
Losing your job can be devastating if you don't have an emergency fund so one of the first things you want to get in place while you are employed is an emergency fund that covers 3 to 6 months of your living expenses. If you do lose your job, you should immediately review your budget to cut back on your expenses as best as you can to maximize the amount of cash you have available until you find a new job. It's all about getting lean with your budget and putting the non-essentials on hold.
6. When you get raise or better paying job
Getting a salary increase or a bonus is always nice but it's important that you have a plan for your increased income and build it into your budget. Your raise or bonus could go towards accelerating your debt repayment or towards your savings. The main goal is to avoid "lifestyle creep" as your income increases.
Lifestyle creep is basically when your wants (the nice to have) increase in cost as you earn more money. Lifestyle creep can make it extremely difficult to save or pay off debt even if you are making a ton of money.
7. When you expand your family
"Children are expensive" - I bet you've heard that a thousand time right? Yes, they are but the thing is, if you plan accordingly, you can cover their costs and still meet your financial obligations but first you have to lay out what their upcoming expenses are, devise a savings and investing plan around these upcoming expenses and most importantly build this plan to your budget.
Having a baby soon? It's a good idea to start saving for a nanny or daycare if you will need these things.
Have a young child with a lot of school activities and trips coming up? Set up a savings account and put a little money aside with each paycheck.
Planning to pay for your child's college education? The get to work investing in a college savings plan.
It's all about the planning AND execution.
Successful budgeting is a work in progress and should be adjusted each month and also as life changes occur - this planning and adjusting is what will allow you to become successful with budgeting and ultimately accomplish your financial goals.