Money Obedience

In many previous posts, we touched on the topic of budgeting such as “Setting up a Budget” , “Kid’s Birthday on a Budget”, and “Avoid Money Black Holes”. But we never really blogged about what happens after one finally sets up a budget. Can’t really budget well if you don’t periodically review your limits, or the demands on your expenditures! So, let’s tackle that topic now. Here we go!

Household budgeting depends really on two sums – the total income of everyone in the household and the expenses of everyone in the household.

A budget is made for a particular period of time, say monthly, or annually. Why? Well, neither income nor expenses are static or fixed – that is, they don’t just stay the same throughout someone’s lifetime. Perhaps at one point in life you’re making investments in education (paying out in expenses for tuition) or reaping those investments (getting paid in terms of higher incomes earned post-degree). But expenses have a way of creeping up to keep up with higher incomes, so as your income goes up, so does the amount of money you spend. (I experienced that myself when I bought my first new car and I took out a car loan to get it.)

For all these reasons, it makes sense to review a household budget regularly. It is not enough to set one up a budget once and leave it at that. There are many developments in life that should prompt one to review a budget. Let me list a few here.

Changes in family life – Any major change in one’s family would warrant a review of the household budget. The most obvious ones happen when someone is added or deleted to the family itself. Think of events like the birth of a child, taking into the household an elderly family member who previously had his or her own household, or the death of a family member, divorce, or the emancipation of a young adult.

Changes in income – As I’ve said before, rising incomes usually lead to rising expenses. But a family may be well advised to review the current household budget and decide whether the income rise should indeed be spent or saved instead. A lower income should lead to lower cost but that is not always possible right away. For example, housing expenses cannot be adjusted immediately in most cases. Think about it: in these post-“houseflipping” days, the mortgage you get is likely to be the mortgage you have for 30 years, so just because your income falls doesn’t mean your mortgage bill does the same. Still, lower incomes should lead you to make a conscientious effort to lower expenses as much as possible. If that lower income persists in the long run, all expenses will have to be taken down including housing expenses – meaning you’ll have to sell the house or move if you’ve got a mortgage or rent that you can’t really sustain.

Changes in needs – Even if our income stays at a reasonable level, our needs change over time. Think about it – as we age, we do less clubbing, more movie watching through www.netflix.com , maybe our health expenses increase but our gym memberships expire and don’t get renewed. Maybe our loved ones start to need special diets or we gain family members who require special medical care. Maybe we do fewer beach vacations, and more holidays with the family. All these mean changes in expenditures to meet those new needs.

Inflation – It goes without saying that higher prices impact a household budget. (I am still flabbergasted by the high price of hot dog rolls!) Incomes may increase with inflation but maybe expenses increase faster. After all, prices go up almost instantaneously, while we all have to wait for annual reviews or union contracts to make sure that our incomes get ratcheted up. This is why, during times of higher than normal inflation, it is necessary to check on a household budget more often.

Other changes – As careful as we’d like to be, some things we have little control over. How about when real estate taxes increase on our home? There is not much we can do about it (except for moving) if we cannot afford the higher payments. So we just have to add those increased expenses into our budget. Ditto if a college-age child’s tuition increases, or medical co-pays go up, or we have a short-term setback, like the ones that result from car accidents that are not even our fault!

All these changes can creep up on you. So set aside a time each month or at least each year to do a check-up on your household budget so you always keep it in good financial health!