Reviewing Your Budget Periodically
If your budget no longer fits your situation or moves you toward your financial goals, you won't be motivated to stick to it. Ultimately, for a budget to be successful, it has to be relevant.
In all probability, after you created your first budget, you gave a deep sigh of relief and figured you'd never have to do that again. Unfortunately, you not only have to continue to update your budget, you have to do it fairly often.
The following sections describe the situations that usually call for revising your budget.
Whenever Your Income Rises or Falls Considerably
Every time you get a raise, even a small one, you need to revisit your budget. That small raise might be the difference between paying off your credit cards in two years instead of three, but that can't happen if you fritter it away.
If your income should drop, you also need to revisit your budget right away. Even a small drop in income can change your entire financial picture.
Whenever Your Expenses Rise or Fall Considerably
Whenever your expenses change, you'll need a new budget. If, for example, you refinance your house from a 30-year mortgage to a 15-year loan, your monthly payments may go up somewhat. This may mean you have to cut back in other areas to afford the new payment.
Whenever Your Family Changes Size
Whether by birth, death, or a parent or other family member coming to live with you, changes in your family's size will result in changes in your expenses, and these changes mean that you need a new budget.
A budget tells you how your financial picture will be affected by your income and expenses, and a new family member may have a significant impact on your ability to meet your financial goals.
On the other hand, when your youngest leaves the house, you may find that you have significantly more money to spend or save. Revisiting your budget can help you see where to put this new-found money.
Whenever You Receive an Inheritance or Other Windfall
Your first reaction at receiving any lump sum of money may be to spend, spend, spend. All that pent-up consumerism may be tempted to run wild with this influx of cash.
Suppose one of your financial goals is to save enough for a 20-percent down payment on a house, and that's going to cost you about $40,000. For the last year, you've been sticking to your budget and have over $6,000 saved. Now you receive $30,000 from a rich uncle who recently passed away. You think of getting new golf clubs or new furniture, right? Not so fast!
Revisit that budget, and you'll find that if you put your inheritance into savings, you're now just $4,000 away from buying that new house. And at the rate you've been saving, you can save that in eight months.
If you use your windfall wisely, you could reach some of your financial goals years, maybe even decades, sooner! But if you spend the money foolishly, you may regret it for years or decades.
Whenever Your Goals Shift
Don't be surprised if your goals change quite a bit as time goes on. One great example of this is how meaningless retirement savings seems to twenty-somethings. In fact, some 40-year-olds are still too far from retirement to care. But the fact is, as your friends and coworkers begin to retire, saving for your own retirement will likely become your number-one financial goal, and you'll attack it with a vengeance.
Your other goals may change, too. Some, like paying off credit cards or buying a house, will disappear because you've reached them. others, like retiring at age 40 or buying a beach house, may simply disappear because you can't cut your expenses or raise your income enough to ever meet those goals. Still others, like paying 100 percent of your kids' college costs, may be replaced with more practical goals, like paying 50 or 75 percent of those costs.
Your goals may begin to shift because of the reality that a budget brings to your financial life. If that's the case, accept that certain goals simply aren't possible, and move forward with the ones that are. But other goals may change for other reasons, and you'll need to pull out your budget to see how these new goals can fit into your financial plan.
Perhaps, for example, you had originally thought you would retire at age 50, but now have a new goal: To retire from your current job at age 50 and start a new business that you'll work at part time until you turn 65. That new goal will have its own expenses and timelines that need to be incorporated into a new budget.