You may have a budget but what if you have a big life change? Move cities, have a baby, buy a home. Budgeting for a lifestyle change can make or break you.
You got the new job in a new place, your family grows, you need to care for a parent. Your old budget won’t do.
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A New Place
What if your new job involves a big change of location? Moving from the suburbs to a city for example. Will you still need a car? Will there be a place to park your car? Maybe, but it might not be free and if it is free, you’ll likely be competing for lots of other people for the spot. Not many attached garages in the big city.
What is the cost of living like compared to your current location? You might be getting a $20,000 jump in income but in the right (or wrong) city, that can be gone just paying deposits and broker fees. City-Data is a great resource to help compare the cost of living between cities.
The Best Laid Plans
Hopefully you’ve planned when to start your family but accidents happen. What if that happened to you? Would you be financially prepared? One of the biggest considerations before having a kid is day care costs. Prices fluctuate widely and sometimes the cost is so expensive, it actually makes more financial sense for one parent to stay home.
A family situation that is harder to predict is that of your parents. None of us want to think about our parents aging and getting ill but it happens and you might have to step in. How much money do they have set aside? Would they want to live with you, stay in their own home, move to an assisted living facility? Who will make medical decisions if they cannot? Have these discussion with your parents before any of this happens.
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Buying A Home
You found a $100,000 home and you have $20,000 to put down, great 20%! No, not great to the bank. They don’t want you to be cleaned out making the down payment. You won’t be able to pay the mortgage or the taxes. You might want to do some renovations so you can put your own stamp on the place. You moved from a studio to a house. Your futon and bean bag chair will look pretty lonely in a 2,000 square foot place. Twenty percent is not enough.
Start A Business
You have a killer idea and you long to quit slaving away for the man and want to start your own thing. Great! How much run way money do you have? What are the start up costs? Is your spouse on board or will they freak out if there isn’t a regular pay check coming in? How will you pay for insurance now that you no longer have it through your employer?
Get A Baseline
Where is your money going now? Before you make any big changes or decisions, you need to know this. If you had to cut to make room for something else, what could you sacrifice? Some things become such an ingrained habit, that you don’t notice anymore just how expensive they are (booze). Not everything has to be completely axed, some things could just be reduced (booze).
Think back to your past. There was probably, hopefully, a time, when you spent less money than you do now but were still happy. Now think how much more you’re spending currently. Does the level of happiness correlate to the greater amount of money you’re spending? Probably not.
It certainly costs more to be an adult than it does to be a college student but if your costs have sky rocketed, it’s unlikely that all of that money is going to fixed costs. A lot of it may be going to lifestyle upgrades, a bigger place, better car, nice clothes. The longer you can live like a student while earning like an adult, the further ahead you will be for the rest of your life.
How Much Do You Cut?
Let’s say you make $50,000. Use a base of 60%, so $30,000 after taxes and savings. Divide the $30,000 by twelve months to get $2,500. That should be your “safety” amount, the amount you try to cut before venturing further.
Talk To Others
Find some people who are in or have been in the situation you will be in soon. People in the city you’re moving to or people who already have kids. What are the unexpected expenses that you don’t really find out about until they happen? Ask them too what they bought before the change that they ended up not really needing. I bet parents have a lot of these.
It’s one thing to make this an intellectual exercise. It’s another to actually live it. So for two months, live in the reality of your future situation. Cut what you will have to cut. Take the money you save and add it to your run way. Because you will need this money in a short space of time, don’t invest it. It’s not your emergency fund. This money should sit tight in a checking or savings account.
Doing a trial run might also prevent a very costly mistake. You might decide not to make the move or have a baby. Making a decision based on economic reasons is one of the best ways to decide. You don’t have to justify your decision to anyone else.
Make A New Budget
Using the data from your trial run, you can set up a new budget for your new circumstances.
If you are someone who puts a lot of monthly expenses on credit cards, for points, cash back, the extra protection, be careful. You have to be certain that you’ll have enough money next month for the current month’s expenses. For some of us, income fluctuates month to month so make sure you’re insulated from that.
Put Together A Plan
You have your run way, you’ve cut your budget, you’re doing a trial run. Now you need to plan. As Mike Tyson sagely noted, everyone has a plan until they get punched in the mouth. But the act of planning is important.
Plan what the first few months will look like in terms of expenses and income. That might mean that expenses are more than income. If that’s the case, how long will your run way last?
You can never plan for all of life’s events but you can plan for some of them. Get your plan in place before you need it.
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