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Having a budget is making sure that you are in control of your finances. Sometimes though, life changes and our personal budget needs to change with us. This is an easy 3 step process to update your budget to ensure your money keep helping you live your best life!
When to review your personal budget
Whenevery your circumstanses change you need to review your budget. It could be:
A salary increase
Loosing your job
Moving in with your partner
Have a kid
Budgeting tips when you have more money
Changes can be positive as well as negative. If we have more money coming in, or less going out then before it’s easy to just spend a bit more but this is really your oportunity to take control and be intentional with your money.
There is a ton of information out there around how to get a pay rise but there is very little information, guidance or data to help us understand what to do when we actually get one. US Senator Elizabeth Warren, former law school professor focusing on bankruptcy law, famously advocates that you save 20% of your income after tax, so if you get a pay rise you would increase your savings to get you back to 20%.
My recommendation would instead be to save between 50% and 90% of your pay rise depending on your goals and circumstances in order to slowly, and without you noticing too much, increases your savings rate.
How to change your budget when you have more money
It’s important to feel that you gained something from your pay rise, and to keep up with inflation for your “fun” money, but as we will see when we start talking about buying a house, pensions and investments, you will really benefit from not letting your ongoing spending run away with you – also known as lifestyle creep.
And trust me, I know. Just look at my example where I got a pay rise last year. I did dedicate 50% of that pay rise to saving and investing but by giving myself a general permission to do some shopping, I very quickly was looking at spending patterns that, in the long run, would have done significant harm to my personal finances.
Now, were you should be on the 50-90% scale is up to you, but I would recommend that if you are really struggling and finding it difficult to buy essentials, only save 50% of the pay rise.
If, on the other hand, you already have a bit of money to spend, then save 90%. You will still get a little boost in your fun account but most of the money will go to more worthwile goals.
Why should I save this much you wonder? We will talk a lot about this further posts on on saving, investing and pensions, but in essence it’s about having F-U money.
To make sure that as you go through life with the option to move if your landlord is being rubbish or to be able to quit your job if it’s really getting to you. It’s about setting you up for a life where you have choices.
Choices about what you do, how you live, and what rubbish you put up with.
Adjusting to having less
Unfortunately it’s not always a change in circumstances leads us to have more money to spend, just as often something happens that impacts our finances in a negative way with the probably the most impactful being if we lose our job or need to take a pay cut for some other reason or have a significant personal change in circumstances like getting a divorce or even have a kid!
When this happens there are three things to focus on as you review your budget.
How to change your budget
1. Fixed outgoings
Look at your budget or your list of direct debits in your bank. Can you change any of these? Depending on the scale of the cut-back this can be looking at any subscriptions you hold (do you really need that magazine or those extra tv channels?) or it may be looking at something bit more substantial like where you are living or how you get around.
Is this the time to sell your car and get your daily movement from cycling around?
A change of circumstances will require you to change your habits and routines so this is an excellent opportunity to look at the life you want to live, and see if you can adjust your spending to help you get there.
2. Look at your discretional spending
Our regular spending is all about habits.
Where do you get your food?
Do you cook or do you take regular take-ways and home delivery?
What do you and your friends do when you see each-other?
Can you start taking a walk together instead of hitting the bar or the coffee shop?
Personally I love taking a walk with a good friend, as it usually leads to really good conversation. We still may get a glass of wine or a tea later but either we get that in each-others home, or even if we do go out, the bill is a lot less than if we spent the whole time there!
We also got some movement and possibly some memories in to help nourish the relationship as well.
Take a look at the habits influencing your spending. This is not about austerity and feeling sorry for yourself for not getting a take-out. It’s an opportunity to make your life work together to a better you, to maximize what you’ve got and make your habits work for you instead of against you.
3. Look at your level of saving
I’m a big proponent for saving and investment so this should really be your last resort. If you just lost your job and have done all the steps above and you really need the money to survive, then you can take a look at your savings rate.
Be clear though that this is a short term measure until you get another job or otherwise get back on your feet, not an opportunity to permanently loose all that saving momentum you have built up!
If your budget is already set and don’t need a review, share this post with someone who is going through a life change and can need some advice getting sorted with their finances!