9 life events that require you to revise your budget


Mmost of the time, when i ask a client to budget for his personal finances, he looks at me like i’ve just insulted his grandmother. However, writing a budget and sticking to it is one of the most effective ways to take control of your personal finances. A well-designed budget shows you exactly where your money is going and makes it easy for you to redirect every dollar.

However, your budget is not a single document. There will be times in life when it will be necessary to review and revise your budget to ensure that it is always leading you in the right direction. You see, any change in your income or expenses can directly affect your tax brackets and debts. When your tax obligations change, you need to reassess your existing tax planning strategies.

With that in mind, I’d like to share nine life-changing events that usher in the need to revise your budget.

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1. When you or your spouse receive a raise

An increase in pay is always a welcome blessing. You could use the extra funds to improve your lifestyle or your savings. As a business owner, you may not receive a pay raise in the traditional sense. However, you could double your business income or earn more money than you expected.

If you operate a sole proprietorship, partnership, S corporation, or LLC that is taxed as a sole proprietorship or as an S Corp, the additional income is transferred to your personal income taxes. Because it can affect your taxes, now is a great time to reassess your budget in order to reallocate your income and expenses.

You could also receive a raise through increased draws and distributions to homeowners, if you have business partners who vote for such increases. It will also have a direct impact on your personal taxes, making it a good idea to consult with your financial planner and CPA when reviewing your budget.

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2. When you or your spouse experience a pay cut or lose a job

Sometimes life goes against our goals. If your business starts to lose revenue, you may need to reduce the amount of money you take out of the business. The losses could trickle down to your income taxes, lowering your Adjusted Gross Income (AGI) and your tax bracket. When you feel the financial pinch of a loss of income or a drop in your spouse’s salary, it’s time to reassess your budget.

Likewise, if your loved one loses their job or if you are forced to stop receiving payment for a period of time while your business is in recovery mode, you will need to revisit your budget. You may need to reallocate money for a while in order to stay afloat during lean times.

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3. When you have exhausted your emergency funds

I have always been an advocate for saving from an emergency fund. Typically, I tell clients to save enough money to cover three to six months of expenses, in the event of a financial emergency. Hope you never have to use it, but if you do, you will need to replace it ASAP. Whenever you are forced to dip into your emergency fund, you need to revisit your budget. You will need to reallocate money for a period of time to replenish your emergency fund.

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4. The birth of a child

Babies are such a joy, but raising a child costs a fortune. There are hospital bills, diapers, food, school fees, etc. Your budget might have been great for you and your spouse, but it probably isn’t for all the expenses that come with your new baby. Even if you already have kids, you need to revisit your budget to accommodate a new addition.

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5. When your marital status changes

Whether you are married or divorced, your financial life is changing. Are you going to keep separate accounts or combine them? How will your divorce affect your taxes? Either way, you should review your budget before either event is finalized. If you are getting divorced, you may want to call on your financial planner and CPA to help you separate debts, assets, and bank accounts, as well as year-end tax planning.

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6. You buy a house or move

If you are moving or buying a new home, there are many factors that can affect your personal finances. Maybe your new home has HOA costs to consider. Maybe the city you are moving to has a higher cost of living than the previous one. Either way, you should always re-evaluate your budget when your life situation changes.

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7. When you have paid off your debts

What a liberating feeling to finally get out of debt. When that time comes, you will have choices to make. Are you going to increase your lifestyle? Are you going to save and invest more? When you have paid off your debts, it is time to reallocate the money that was going to be used to pay off your debts. Think about what you want to do with this money or you just might just waste it.

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8. When you are experiencing a major tragedy

Unfortunately, tragedies are a part of life. Natural disasters could destroy your home or business. Accidents or illnesses could claim the lives of loved ones. While you may have insurance to help you in these scenarios, it might not be enough to replace income or cover all of the expenses associated with your tragedies. For your financial peace of mind, you should always re-evaluate your budget during these times.

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9. If you receive an inheritance

Always review your budget when you receive an inheritance. You don’t want to steal it, but saving and investing it all might not be the best use. Look at your expenses and estimate your cash flow.

These are just a few of the many events that should trigger a budget review. When reviewing your budget, make sure it is tax sensitive. The more you know how to budget and properly use cash flow, the better suited you are to deploying the right amount of assets and dollars in the right places.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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