A change in Income:
A change in a person’s income is a key event when one should review their budget. Here, a change in income can be both, an upward or a downward revision.
An increase in income is a desirable situation, and budget should be reviewed in the sense that where should this incremental income be allocated towards. Whether it should go to meet expenses or make investments is a decision that should be made. And in a situation where income is decreased, adjustments need to be made in a way that the overall finances remain intact.
Standard of living:
As an individual’s standard of living increases, he/she will tend to spend more on needs and desires. This means more expenses from the same income stream. In this situation, it becomes necessary to strike a tradeoff between increased expenses and savings and investments. Reviewing budget when this situation occurs becomes crucial as once an individual’s standard of living increases, it is unlikely to go down from there!
Key life events:
When some key life events such as an individual’s marriage or a child’s birth takes place, reviewing budget becomes necessary. These key life events bring with them a lifetime of increased expenses. In some cases where income also increases along with expenses, it is a plus point. For example, when a couple welcomes a newborn into the house, it would mean a lot of baby care expenses. And these are the expenses you won’t be ready to compromise on! Hence a review becomes necessary.
Huge purchases on loans:
When large purchases are made especially on loans, their impact needs to be accounted for in the budget. Suppose if an individual purchases a house or a car on loan, it would bring with it monthly interest payments for a considerable time period. Hence it becomes necessary to analyse the effect that these additional expenses will have on all the budget components.
If an individual or members of his/her family are identified with some life threatening disease, a budget review is must! A critical disease will mean huge medical bills. Also consider the fact that medical inflation in India stands at 10% per annum. It would be hard to pay attention to one’s budget during these tough times, but it is necessary for one’s financial wellbeing.
These were five situations when an individual should review his/her budget. For these key situations in one’s life bring along with them some permanent increased expenses, and the ultimate goal of a budget review is to inculcate these expenses into the existing budget without compromising on savings/investments. That is the key goal!