Budgeting Basics - Maintaining Your Budget
A budget should evolve as your circumstances change. Don't expect the budget you made at 25 to still work for you at 35, or even 27. Your income and expenses will change over time, often annually. You might also face a financial emergency or receive a windfall, such as an inheritance. Whether you experience a major financial event or a smaller one like getting a raise, you'll want to update your budget accordingly. In this section, we'll discuss some common changes to your life and how you might want to adjust your budget as a result.
1. Getting a Raise
When you get a raise, you should consciously choose how you will spend the extra money. First, keep in mind that if you get a raise of $200 a month, it won't be nearly that much after taxes. If your marginal tax rate is 25%, an extra $200 a month will leave you with $150 after taxes - less if you also pay state taxes. Just like you've done with the rest of your money, decide what the best use of your new income will be. Do you want to save it? Improve your cable lineup? Go out to eat more? If you don't decide what you want to do with the money, it might evaporate without you knowing where it went.
2. Losing Your Job
If you lose your job, you'll almost certainly need to scale back your spending.
Examine your budget to see where you can cut back. You may be able to cut out a particular category entirely, like going out to eat. Or you may be better off making smaller cuts in several categories, like decreasing your grocery bill by $20 a month. You may not be able to reduce your expenses enough to fit the reduced amount of money you have to spend, but because you've been budgeting, you should have at least some money stashed away for emergencies. This is the time to use it if you need it.
If you haven't started to budget yet, and you've lost your job, then picking up a part-time job can go a long way towards helping cover bills as you hack and slash your spending.
One exception would be if you've been at a company so long that you receive a generous severance package with which you can maintain your same quality of living for an extended time. Barring that, a smaller severance package or state unemployment insurance can help tide you over, but neither will provide you with the kind of income or financial stability you're probably used to. (For more on severance, read Negotiating Severance Agreements.)
3. Having a Financial Emergency
Losing your job could certainly count as a financial emergency, but it's not the only one you might encounter. Your beloved 1988 Honda might suddenly sputter its last breath - or at least the last breath it's willing to take unless you want to pay for some costly replacement parts. If you don't have good public transportation where you live or a friend, relative or coworker who can take you to work, you'll need to find a new vehicle fast, and probably rent one in the meantime. Again, your emergency fund is a good place to look for the money for a new car. If you don't have an emergency fund, you'll have to find the money elsewhere in your budget. Even if you do have an emergency fund, you'll need to adjust your budget so you can replenish it over the upcoming months.
4. Making A Big Purchase
Adjusting your budget so you can afford a major purchase, like a new car or a wedding, is similar to adjusting it for when you lose your job or have a financial emergency. You'll need to find significant ways to cut back in one or more spending categories and perhaps a way to increase your income as well. The difference is that since you're cutting back for something you chose, it won't be as painful.
5. Incurring a Major New Expense
If you buy a house, have a child, send a child to college or the like, you'll need to adjust your budget permanently (for quite a few years at least). This may require you to rethink every aspect of your earning and spending. For example, is there a way you can make more money? Do you really need cable TV? Can you ditch your land line and use VoIP instead?
To prepare yourself for the change and make sure you can afford it, adjust your budget several months in advance and pretend as if you already have the new expense. This way, if you find out you can't meet all your obligations, you won't incur any real damage and you'll have time to fix things before the real expense kicks in.
6. Overhauling Your Social Life
If you go from being a homebody to party animal, your financial situation will change too. Also, if you start dating someone new, this can shift your finances for better or for worse, depending on which side of the spending equation you're on and the tastes of the person you're dating.
7. Changing Your Habits
Any time you change your habits, you will see a corresponding change in your finances - sometimes giving you more money, and sometimes less. Sometimes being a healthier person doesn't equate to healthier finances though. For example, if you decide to trade in your steady diet of pizza and cheeseburgers for one that includes foods like fish and fresh produce, you may see your grocery bill increase. If starting a new exercise routine is also part of this lifestyle change, you may need to factor a gym membership into your monthly budget, or at least a new pair of tennis shoes. But if you rid yourself of a habit like smoking, not only will you immediately reduce the unhealthy pull on your budget, you'll also reduce the unhealthy pull on your cardiovascular system.
8. Getting Rid of a Major Expense
If you've finally finished putting all your children through college and they've all moved out and acquired jobs, not only will you no longer have tuition expenses, you'll be free of paying for someone else's food, clothing and other costs. Paying off your mortgage is another time in your life when your expenses will significantly decrease. What will you do with all this extra money? Your budget's goals can guide you. Maybe you'd like to work less and enjoy life more, take a major vacation or ramp up your retirement savings.
As you can see, multiple factors can change your financial situation from month to month and year to year. It's important to be flexible and adjust your budget to reflect these changes so that you'll be able to continue making the best possible use of your money.
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