In How Much Should I Pay Myself from My Business, I advised business owners to build a personal budget to determine how much money to take home from their company’s proceeds. Yet, life happens. Sometimes, you have to adjust your income to cover increased or unexpected expenses. Other times, you may not need to take home as much income because you’ve paid off some of your monthly expenses. Budgeting is not a one-and-done exercise. It’s an ongoing process that you must reevaluate occasionally so that you and your financial advisors can determine the best tax planning strategies for you. So, just how often should you revisit your budget?
When I talk about reevaluating your personal budget, I’m not talking about monitoring it like software and apps do. Yes, you can use a budgeting app to track your income and expenses. Obviously, you need to know where your money’s going and if you need to bring home more or less money a particular month or two. Yet, you need to do more than track your budget.
Major life events and changes can directly impact your income and expenses. Any change to your income or expenses can directly affect your tax brackets and liabilities. When your tax liabilities change, you need to reevaluate your existing tax planning strategies. Thus, I recommend reevaluating your budget when any of these 12 things happen.
You may say, “Well, Justin. I’m a business owner. I never get a raise.” Yes, you do. I know better than that. You may not pay yourself a W-2 paycheck or you may not pay yourself a consistent owner’s draw, but you may end up doubling your business’s revenue or making more money than you expected. If you own a sole proprietorship, a partnership, an S Corp, or an LLC taxed as a sole proprietorship or S Corp, that additional business revenue passes through to your personal income taxes. Therefore, it’s time to reevaluate your budget and reallocate your income and expenses.
What if you have business partners? The partners could vote to increase the owners’ draw or distribution amounts. Besides affecting the income and expenses you’ve allocated to your personal budget, that directly affects your income taxes, too. You may see no problem taking home extra income, but by the end of the year, Uncle Sam will claim his share. Thus, you must be prepared. Talk to your financial planner and your CPA so that you know what to do with the extra money.
Maybe you have a spouse who works outside of your business. If he or she gets a significant raise, that extra money could place you into a different tax bracket. Therefore, you would want to take another look at your budget with a financial professional to see if you can employ new or different tax planning strategies.
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On the flip side of number one, what if your business begins losing revenue? What if you have to decrease the amount of money you’re taking home from the company? What if your business losses pass through to your income taxes and lower your adjusted gross income and your tax bracket? If the business’s revenue has decreased, you and/or your business partners could elect to cut your draw or distribution to sure up the business during rough times. Thus, just as you’d reevaluate your budget if your spouse took a pay cut from another job, it’s time to reevaluate your budget.
If you’re a business owner, you’re not technically “employed” (unless you are a S-corp or C-corp). However, your company can still lose valuable customers, contracts, bids, and jobs that significantly decrease your business’s revenue and your personal income. Maybe you have to stop bringing home income for a time. If that happens or if your spouse (who works outside of the business) losses his or her job, you’re going from a two-income household to a one-income household. Yet, you’ve been living the lifestyle of a two-income household. It’s time to reevaluate your budget and make the necessary adjustments.
What happens if your emergency funds drop? You have an emergency fund in place to prevent unexpected expenses from breaking your monthly budget. Yet, life happens. A meteor falls and hits your roof. Your HVAC unit goes out. Your car transmission dies. Whenever life happens, it’s time to take another look at your budget. You may need to re-deploy some dollars to rebuild your emergency fund.
RELATED READING: What is an Emergency Fund? Why is it Absolutely Essential?
Bringing a new life into the world is an incredible, life-changing experience! Your heart expands, but your wallet may contract. Although you may be spending less on restaurants and entertainment, you’ll be spending more on food, clothing, child care, and the like. Can your current budget handle the additional expenses? Are you robbing your savings to pay your new expenses? It’s time to take another look at your budget.
How exhilarating is getting married to the love of your life? Yet, amidst the butterflies and roses, you’ve got some financial issues to address. Whether you’re getting married or moving in together, you have to decide whether you will have joint bank accounts or separate accounts. Will you continue to operate separate budgets, or will you pool your resources and operate your household from one budget? Who will be paying which bills? How will your significant other’s income and expenses affect your life? Ideally, you should discuss these financial and budgetary issues before the wedding so you’re prepared for life after the wedding.
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Yet, what if the butterflies in your stomach disappear and the blooms of your love fade away? Just as you have to readdress your budget when you get married, you have to readdress it if you get a divorce or separate. If your divorce is particularly unpleasant, you may even have to get a financial planner involved to help you separate your assets, your liabilities, and your bank accounts. Bring in your CPA, too, because end-of-year tax planning will get particularly tricky in a divorce. Who claims dependants? Who claims assets? How do you separate tax credits and deductions? Unfortunately, this type of budget reevaluation may be a slow, painful process.
RELATED READING: Moving On… Financial Tips for After Divorce
On a happier note, what if you buy a house? While you’re painting, decorating, and moving in, don’t forget to reevaluate your budget! Hopefully, you’ve examined your budget before you bought the house to make sure you’re not spending too much of your budget on your mortgage payments. Yet, don’t forget to budget for homeownership expenses as well as mortgage payments. You’ll have monthly utility and water bills. Perhaps, you have HOA fees or garage rental fees. Eventually, you’ll need new appliances, carpet, HVAC units, roofs, etc. Do you need to budget for new furniture or fixtures? Paying to maintain and keep-up a house can get costly. Therefore, reevaluate your budget when you buy a new house.
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Maybe you didn’t buy a house, but you moved locations. Before you move to that new city, take a look at your budget. How different are the economics of your new venue? Will your cost of living expenses be higher or lower in that new city or state? Does your new location have state income taxes that your former location did not? Depending on the new marketplace, you may have to structure your cash flow differently. Perhaps you allocate more for house or rent payments and less for entertainment. Maybe you take another look at your expenses to see if you can lower any of the variable ones to make sure you’re still setting money aside in savings or investments. Moving brings about much change in people’s lives, so make sure you reevaluate your budget to keep your financial life secure during that time.
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What happens if you pay off your debts? Praise Jesus! Hallelujah! Time to look at your budget. Do you increase your lifestyle and expenses at this point? Do you not? Should you allocate more of your income to investments? Should you invest more money into your business? Sometimes, if you pay off personal debt, you may need to use business debt to help lower your tax liabilities. So, be sure to talk to your financial planner about tax planning strategies at this point in your life.
RELATED READING: Understanding and Using Business Debt Strategically
Another time to reevaluate your budget is after a major tragedy. What happens if hurricanes, floods, or tornadoes rip through your town? What if natural disasters destroy your house or your business? Sure, you should have insurance in place to help you rebuild, but if your business is destroyed, where will your income come from while you’re rebuilding? What if accidents claim the life of a loved one? What if your spouse dies of cancer or your daughter dies in a car accident? How will those tragedies affect your income and expenses? You might incur significant debt while you’re trying to rebuild or while you’re burying a loved one. Unfortunately, you’ll have to adjust your budget to handle those unexpected expenses or debts.
RELATED READING: IRS Offers Tips for Disaster Preparedness
If you receive an inheritance when a loved one passes away, it’s definitely time to reevaluate your budget. This last year, a very dear family member of mine passed away unexpectedly and left my brother, my sister, and me a bit of inheritance. We all had to take a time out and say, “Okay, what are we going to do with the money? How does this affect our cash flow and our debt?” Obviously, you want to use the money wisely, but saving/investing all of it may not be the best thing to do with the money just as spending all of it is not the best use of it.
RELATED READING: I Just Inherited Money! Now What?
If you experience any of these 12 life-changing events (or others), it’s time to re-evaluate your budget. Yet, just what are you evaluating? Well, it’s simple. You’re going to make sure you are paying down the right amount on debts. You want to be investing, and you want to keep your cash flow at a minimum so that you can maximize your tax planning strategies. Taxes are the key. You want to create a budget, and you want it to be tax sensitive. The more you know how to budget and utilize cash flow properly, the better able you are to deploy the right amount of assets and dollars to the right locations.