How to Adjust Your Budget As Your Family’s Needs Change
How will your budget change as your financial responsibilities change? Here’s what we’re watching this week.
Every Monday, we address one of your pressing personal finance questions by seeking advice from several financial experts. If you have a general question or money issue, or just want to talk about something PeFi-related, leave it in the comments or email me at [email protected].
This week a question from Sarah:
I’m curious if your budget should change with life. I have two small children, so I have to look after the children and I also pay off my student loans. We expect to save more and have more money for a higher mortgage as soon as the loans are paid off and we get the raise and the kids leave kindergarten (my husband and I work in the public sector, so we have predictable increases and stable work). But is it dangerous to wishful thinking? More generally, how do we allocate our income (what percentage on mortgages, savings, etc.)?
This is what individual experts usually say about a problem that affects each person differently: if you need personalized advice, you should see a financial planner.
Flexibility is key to budgeting, as it is to life
When it comes to your finances, there is no one size fits all approach. This is true for groups of people as well as in the life of an individual. That’s why it’s best to think of your budget as a living, breathing document that will need adjustments and changes as you get older and your income, priorities, and circumstances change.
“The budget is not something you can set and forget, you need to constantly revise and update it as your income and financial situation change,” says Cameron Huddleston, columnist for Life and Money at GoBankingRates . “The most important thing is to have a plan, but know that it will change over time as your situation changes.”
So, for example, while a large part of your budget may be devoted to paying for kindergarten right now, that will eventually decrease. This will bring some relief and the need to rethink your plan.
“Once that money is freed up, you will need to check your financial situation,” says Huddleston. “If you don’t have a contingency fund, this is one of the first things you need to think about.”
Standard advice for an emergency fund is to save up the necessary expenses for three to six months, but if that seems too onerous, Huddleston recommends saving enough cash to cover your insurance deductions (home, car, and medicine) in cash so you don’t have to put them in. at stake and bear high interest rates. This should give you some peace of mind as you work on that bigger cash cushion.
Saving for retirement should be your next priority. Ideally, you set aside about 15 percent of your income for retirement (in an investment account such as a 401 (k), 403 (b) or traditional or Roth IRA), including anything your employer gives you, provided you have one. … Huddleston recommends increasing your retirement savings as soon as the child care payments stop, rather than investing that money in a mortgage, although of course that decision ultimately rests with you and your husband. She says 28 percent of your monthly income is your standard mortgage payment, although something less is clearly preferable (say 25 percent).
Greg McBride, chief financial analyst at Bankrate.com , says that when it comes to structuring your budget, the worst thing you can do is base it on estimated earnings, not actual earnings. “Housing is a common area in which people do this by buying a home that they expect to ‘grow’ into as income rises,” McBride says. “Even if your raises are predictable, there may be other factors that you cannot foresee now that may come into play before these future raises frustrate your plans.”
While you can count on steady wage increases and extra money from kindergarten costs, you shouldn’t base your mortgage on these projections. Because life will happen and you will not be able to pay adequately.
Automate What You Can
If you need something simple, the 50/20/30 budgeting system is as simple as possible: spend no more than 50 percent of your income on basic necessities (housing, food, transportation), spend 20 percent on savings and debt reduction … and spend the last 30 percent on whatever you want. This could include additional debt payments or additional retirement expenses. It’s up to you to play.
“I don’t think wishful thinking is thinking they can save more,” adds Huddleston.
So, first, focus on your savings, “ideally through payroll deductions, direct deposits and automatic payments from your checking account,” McBride suggests. This is especially important when supporting children. Then decide how to distribute what you have left.
For example, you can spend the surplus on your pension, on your future home, or on your student loan. Speaking of which, they can obviously feel like a huge burden that weighs on you and causes stress. But if you have a manageable amount and a low interest rate, it is probably better to prioritize your retirement investments than to pay them off early, because you are likely to get a higher rate of return. For example, the S&P 500 had an average annual return of about 11.7% from 1973 to 2016. This is much higher than the student loan interest payments. And the sooner you start saving for retirement, the less you will have to save in the long run, because that money adds up. See if you are eligible for a student loan interest tax deduction.
If you find that they cannot be dealt with given your current situation, you may want to consider refinancing or spreading payments over several months, which will lower your payment amount (although it will increase the total amount you will pay). And stay away from any company that promises to “help” you pay off loans faster or for less money than you do right now – this is most likely a scam.
“As long as you contribute enough to your workplace retirement plan to qualify, donate at least that much, and if you’re really worried about your student loans, then focus on that,” Huddleston says. “But don’t miss the match.”
To that end, as McBride suggested, automate as much as possible. When all your bills and other responsibilities are paid automatically, you will have a much better understanding of how much you actually need to spend from month to month.
As these accounts change, so will your budget. As long as you keep records, everything will be fine.