Most of the time, when I tell a client to draw up a budget for their personal finances, they look at me as if I just insulted their grandmother. But, writing a budget and sticking to it is one of the most effective ways of taking control of your personal finances. A well-designed budget shows you exactly where your money is going and enables you to easily redirect each dollar.
However, your budget isn’t a “one and done” document. There will be times in life where it’s necessary to review and revise your budget to ensure that it is still taking you in the right direction. You see, any change to your income or expenses can directly affect your tax brackets and liabilities. When your tax liabilities change, you need to re-evaluate 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.
Certified Financial Planner Board of Standards Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
1. When You or Your Spouse Receives a Pay Increase
An increase in compensation is always a welcomed blessing. You could use the extra funds to boost 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’s revenues or make more money than you expected.
If you operate a sole proprietorship, a partnership, an S Corporation or an LLC that is taxed as a sole proprietorship or as an S Corp, the additional revenues pass through to your personal income taxes. Because it can affect your taxes, this is a perfect time to re-evaluate your budget to reallocate your income and expenses.
You could also receive a raise through increased owner’s draws and distributions, if you have business partners who vote for such increases. This will also directly impact your personal taxes, making it a good idea to consult your financial planner and CPA while revising your budget.
Sponsored Content
2. When You or Your Spouse Takes a Pay Cut or Loses a Job
Sometimes, life moves in the opposite direction of our goals. If your business begins to lose revenue you might need to decrease the amount of money you’re taking from the company. The losses could pass through to your income taxes, lowering your adjusted gross income (AGI) and your tax bracket. When you feel the financial pinch of lost revenues or a decrease in your spouse’s pay, it’s time to re-evaluate your budget.
Similarly, if your significant other loses their job or you are forced to stop taking payment for a time while your business is in recovery mode, you’ll need to revisit your budget. You may have to reallocate money for a while in order to stay afloat during lean times.
Sponsored Content
3. When You’ve Depleted Your Emergency Funds
I’ve always been an advocate for saving an emergency fund. Typically, I tell clients to save enough money to cover three to six months’ of expenses, in case of a financial emergency. I hope that you never have to use it but if you do, you’ll need to replace it as soon as possible. Anytime you are forced to dip into your emergency fund, you need to revisit your budget. You’ll need to reallocate money for a little while to rebuild your emergency fund.
Sponsored Content
4. The Birth of a Child
Babies are such a joy, but raising a child costs a fortune. There are hospital bills, diapers, food, educational expenses, etc. Your budget may have been just fine for you and your spouse, but it’s not likely set up for all the expenses that come with your new little bundle of joy. Even if you’ve already got children, you need to review your budget to accommodate for a new addition.
Sponsored Content
5. When Your Marital Status Changes
Whether you’re getting married or divorced, your financial life is changing. Will you keep separate accounts or combine them? How will your divorce affect your taxes? Either way, you should review your budget before either event has been finalized. If you’re getting divorced, you may want to involve your financial planner and CPA to assist in separating liabilities, assets and bank accounts, as well as end-of-year tax planning.
Sponsored Content
6. You Are Buying a Home or Moving
If you’re moving or purchasing a new home, there are many things that can impact your personal finances. Perhaps your new home has HOA fees to consider. Maybe the city that you’re moving to has a higher cost of living than your previous one. Whatever the case, you should always re-evaluate your budget when your living situation changes.
Sponsored Content
7. When You’ve Paid Off Your Debts
What a liberating feeling it is to finally get out from under debt. When that time comes, you’ve got some choices to make. Will you increase your lifestyle? Are you going to save and invest more? When you’ve paid off your debts, it’s time to reallocate the money that was going toward paying your debts. Be thoughtful about what you want to do with this money, or else you could just fritter it away.
Sponsored Content
8. When You Experience a Major Tragedy
Unfortunately, tragedies are a part of life. Natural disasters could wipe out your home or your business. Accidents or disease could claim the life of loved ones. While you may have insurance to help with these scenarios, it might not be enough to replace income or cover the full expenses associated with your tragedies. For your own financial peace of mind, you should always re-evaluate your budget during these times.
Sponsored Content
9. If You Receive an Inheritance
Always revisit your budget when you receive an inheritance. You don’t want to pilfer it away, but saving and investing it all may not be the best use, either. Look at your expenses and evaluate your cash flow.
These are just a few of the many events that should trigger a budget review. When reviewing your budget, be sure it’s tax sensitive. The more you know how to budget and utilize cash flow properly, the better suited you are to deploy the right amount of assets and dollars to the right locations.
Sponsored Content
-
How to Navigate Your Medicare Advantage Plan in a DisasterIf you're a Medicare Advantage member in an area that has been impacted by a disaster, you might be worried about access to care and medicine. Here's what you need to know.
-
Older Investors: Boost Your Savings and Retire EarlierThis one measure can help older investors retire up to two years earlier and potentially double their retirement savings.
-
I'm a Financial Adviser: This Is How You Could Be Leaving Six Figures in Social Security on the TableClaiming Social Security is about more than filing paperwork and expecting a check. When you do it and how you do it have huge financial implications that last the rest of your life.
-
The Big Pause: Why Are So Many Americans Afraid to Retire?While new research sheds light on Americans' growing reluctance to quit work in later life, can anything be done to help those with the retirement jitters?
-
Five Under-the-Radar Shifts Investors and Job Seekers Can't Afford to Ignore Under the OBBBBeyond the headlines: The new tax law's true impact for job seekers and investors lies in how it will transform industries and create opportunities in areas such as regional accounting, AI and outsourced business services.
-
I'm a Financial Professional: It's Time to Stop Planning Your Retirement Like It's 1995Today's retirement isn't the same as in your parents' day. You need to be prepared for a much longer time frame and make a plan with purpose in mind.
-
An Attorney's Guide to Your Evolving Estate Plan: Set-It-and-Forget-It Won't WorkWhen did you last review your will? Before kids? Before a big move? An update is essential, but regular reviews are even better. Here's why.
-
For a Richer Retirement, Follow These Five Golden RulesThese Golden Rules of Retirement Planning, developed by a financial pro with many years of experience, can help you build a plan that delivers increased income and liquid savings while also reducing risk.
-
Time for a Money Checkup: An Expert Guide to Realigning Your Financial GPSEven if your financial plan is on autopilot, now is the perfect time to make sure it's still aligned with your goals, especially if retirement is on the horizon.
-
Five Things to Do if You're Forced Into Early Retirement (and How to Reset and Recover)Developing a solid retirement plan — before a layoff — can help you to adapt to unexpected changes in your timeline. Once the initial panic eases, you can confidently reimagine what's next.
