You've established a budget, set goals for yourself, and you're tracking your expenses each month to hold yourself accountable. You've got this personal finance thing figured out.
Fast forward to a year or two from now and suddenly you find yourself with more days at the end of the month than you have money. But you established a budget and were managing your finances so well, what happened?
Most likely that budget that you so carefully crafted is no longer meeting your needs. Expenses change all the time your budget needs to change with them.
So, how often should you be looking at your budget and fixing what no longer works? The exact answer will depend on your individual needs and financial well-being. But here are some quick guidelines that can help you decide if now is a good time to update your budget.
Has your income changed?
If your income recently changed, either by going up or going down, it may be time to take a look at your overall budget.
If your income went up, you'll need to decide where you want to put that extra money. Establish a new goal to build up emergency savings, pay down debt, or invest more in your retirement.
If your income went down, you can look to see if there are expenses that need to be cut, or if there are additional sources of income you can pursue.
If you haven't had a pay raise in ages, it is still worthwhile to take a close look at your income since changes in tax law and benefit elections can have a sizeable impact on your take-home pay.
Have you had any major life changes?
If you recently got married, divorced, had a baby, or experienced any other major life changes, now would be a good time to revisit your budget. Even if you think your expenses haven't really changed, you might be surprised when you actually sit down to look through them.
For instance, moving into a house with a monthly mortgage payment similar to the rent you were previously paying may not seem a worthwhile reason for updating your budget. But what does your new commute look like? Is food more or less expensive in your new area? Have you factored in maintenance costs?
Even if the life change itself doesn't seem to impact your budget, some of the smaller associated costs may have changed.
Have you taken on new expenses or bills?
It doesn't take major life changes to potentially impact your budget, smaller changes can also have an effect on your monthly expenses.
Perhaps you recently changed electricity providers. Even if this was for the purpose of saving money, you should still update your budget with the new payment amount.
Or maybe you needed to purchase a new couch and are making monthly payments. Even what may seem like a small, insignificant payment should be factored into your monthly budget.
Did you recently pay off debt?
If you recently paid off debt, then first of all, congratulations are in order. It can be a huge relief to get that debt off your back.
Now that you have it paid off though, have you considered what to do with the extra money that you now have?
If the answer is no, then you might want to take a look at your budget. It may seem smart to just let that extra money build up in your checking account, but this isn't always the best solution.
If you are the type of person that sees extra money in your account as a temptation to spend it, then keeping the money there would be a poor choice.
Instead, look at how the extra money can best benefit you. Perhaps you can snowball this money into other debt repayments. Or maybe you would like to save up for a downpayment on a house. Either way, set a goal and create a new line item on your budget to account for it.
How long has it been since you last updated your budget?
If the answer is a few years, then you'll definitely want to take a look at updating your budget sooner rather than later. Even if you believe there have been zero changes in your expenses or income, it is still worthwhile to double-check to avoid any nasty budgeting surprises.
The general rule of thumb is to re-evaluate your budget at least once a year, but depending on your circumstances, you may need to re-evaluate your budget quarterly or even monthly.
If, for instance, you are on a fixed income, you'll want to constantly keep a close eye on your budget to make sure your expenses are on track. Perhaps as often as once a month.
And on the flip side, if you are an independent contractor or small business owner with an unpredictable income, you'll want to re-evaluate your budget at least once a quarter when you estimate your tax payments and adjust your budget as your income fluctuates.