How to Adjust Your Budget as Your Family's Priorities Evolve

How does your budget need to adapt as your financial duties expand? This is the question we're exploring this week.

Every Monday, we’re addressing one of your key personal finance inquiries by consulting several money experts for their perspectives. If you have a general financial question or concern, or simply want to discuss anything related to personal finance, feel free to leave a comment or email me at [email protected].

This week's inquiry comes from Sara:

I’m wondering if a budget should shift as life circumstances change. I have two young children, which means significant daycare expenses, and I’m also paying off student loans. We plan to save more and allocate additional funds toward a larger mortgage once the loans are cleared and our salaries rise, plus once the kids are out of daycare (both my husband and I work in the public sector, so our raises are predictable and our jobs are secure). Is this just wishful thinking? More generally, how should we distribute our income (what percentage for mortgage, savings, etc.)?

This is the general advice shared by experts on an issue that impacts everyone in different ways—if you’re seeking tailored guidance, consulting a financial planner is recommended.

Adaptability is Crucial in Budgeting, Just Like in Life

When managing your finances, there’s no universal solution. This applies both among different groups and within an individual’s life. It’s best to consider your budget as a dynamic tool that will require adjustments as you age and as your income, priorities, and life circumstances evolve.

“A budget isn’t something you can just set once and forget about; you need to regularly assess and adjust it as your income and financial situation shift,” says Cameron Huddleston, Life and Money columnist for GoBankingRates. “Having a plan is crucial, but understand that it will need to change over time as your circumstances evolve.”

For instance, while a large portion of your budget might currently go toward daycare expenses, that will eventually decrease. With this reduction comes some financial relief, and it will be time to reassess your strategy.

“Once you free up that money, it’s important to take a close look at your financial situation,” advises Huddleston. “If you don’t have an emergency fund, that should be one of your top priorities to establish.”

The typical recommendation for an emergency fund is to save enough to cover three to six months' worth of essential expenses. However, if that seems overwhelming, Huddleston suggests saving enough to cover your insurance deductibles (home, car, medical) in cash, so you avoid putting them on credit and accumulating high interest. This will provide some security as you work toward building a more substantial emergency fund.

Your next focus should be saving for retirement. Ideally, aim to set aside about 15 percent of your income for retirement (in an investment vehicle like a 401(k), 403(b), or a traditional or Roth IRA), including any employer contributions, if available. Huddleston recommends increasing your retirement savings once daycare expenses decrease, rather than directing that money towards your mortgage. However, this is a personal decision for you and your husband. A standard mortgage payment is typically 28 percent of your monthly income, though aiming for a lower percentage (say, 25 percent) is generally better.

Greg McBride, chief financial analyst at Bankrate.com, warns that basing your budget on anticipated income instead of actual income is a common budgeting mistake. “Housing is an area where people often do this, purchasing a home they expect to ‘grow into’ as their earnings increase,” explains McBride. “Even if you anticipate predictable raises, there could be unforeseen factors that affect your finances before those raises kick in, potentially derailing your plans.”

While you may be relying on regular raises and extra funds from reduced daycare costs, it’s unwise to base your mortgage on these projections. Life will inevitably throw curveballs, and you might find yourself unable to comfortably meet your mortgage payments.

Automate What You Can

For an easy-to-follow approach, the 50/20/30 budget system is one of the simplest: Allocate no more than 50 percent of your income for essentials (like housing, food, and transportation), put 20 percent towards savings and debt repayment, and use the remaining 30 percent however you choose. This might involve making extra debt payments or boosting your retirement savings. The choice is yours to experiment with.

“I don’t think it’s unrealistic to believe that they can save more,” says Huddleston.

First, focus on building your savings, “ideally by setting up payroll deductions, direct deposits, and automatic drafts from your checking account,” advises McBride. This becomes even more crucial when you have children to support. After that, figure out how to allocate the rest of your income.

For example, you could use any extra funds to contribute to your retirement, save for a future home, or pay down student loans. Speaking of student loans, they can undoubtedly feel overwhelming and stressful. However, if your loans are manageable and have a relatively low interest rate, prioritizing retirement savings over paying off loans early may be a better option, as you’ll likely achieve a higher return on investments. For instance, from 1973 to 2016, the average annualized return of the S&P 500 was around 11.7 percent, much higher than most student loan interest rates. The earlier you start saving for retirement, the less you’ll need to set aside in the long run due to the power of compound interest. Additionally, check if you’re eligible for the student loan interest tax deduction.

If you find that your loans aren’t manageable with your current circumstances, consider refinancing or extending the payment period, which can reduce your monthly payments (though it will increase the total amount you pay over time). Be cautious of any company that claims to “help” you pay off your loans faster or for less money than you currently owe—it’s likely a scam.

“Make sure you’re contributing enough to your workplace retirement plan to receive the full match—at the very least, contribute that amount. If your student loans are stressing you out, then focus on paying those down,” advises Huddleston. “But don’t miss out on the match.”

With that in mind, automate as much as possible, just as McBride recommends. When your bills and financial obligations are handled automatically, it gives you a clearer picture of how much disposable income you have month-to-month.

As your bills evolve, so will your budget. As long as you stay on top of things, you’ll be just fine.