A:

The first step in planning for long-term goals is actually determining how much you spend on short-term expenses. Once you know how much money is spent on the here-and-now, you can assess how much money can be put into investment vehicles for the future.

Regular monthly expenses such as cable or cell phone bills should be easy to assess, but what about less frequent expenses like yearly insurance premiums? You can take these large lump sums and pro-rate them over the number of months from the time that you start the budget to when the event occurs. For example, if it's currently December and your $2,000 insurance premium is due at the end of next October, you should put aside $200 per month for the next 10 months (January-October). This will take care of uneven expenses like holidays, birthdays and insurance premiums.

After you determine your monthly expenses and pro-rate annual expenses, subtract them from your monthly income in order to figure out how much income you have left to contribute toward your long-term goals.

Long-term goals can be considered anything longer than one year into the future. This includes buying a car or home, sending the kids to college or planning for retirement. Your long-term goals should come with a solid estimate of their costs. Start by writing down several long-term goals along with your best guess on how long it will be before money would be needed. An example list may look something like this:

  • College expenses - Child 1 (current age 8); $20,000/year beginning in 10 years
  • College expenses - Child 2 (current age 3); $24,000/year beginning in 15 years
  • New car purchase - $30,000 in two years ($4,000 upfront + $400/month for seven years)
  • Vacation to Europe - $10,000 for a three-week vacation within three years

Afterward, you should use a spreadsheet or other software program to figure out how much must be be put away for these future events. Suitable investments can then be determined according to time frame and your overall risk tolerance. Historical asset returns can be used to estimate how much the investments will hopefully appreciate over several years. (To learn more, see Projected Returns: Honing The Craft.)

The goal is to determine if the amount of money that you have remaining after paying your short-term expenses will allow you to meet your goal. If it doesn't, you need to adjust your goals, cut expenses and/or earn more income. It's important to regularly update the status of you long-term goals and short-term expenses. New regular expenses can emerge, and if you don't make changes to your plan, you'll come up short.

For more on creating a budget that you can live with, see Enjoy Life Now And Still Save For Later and The Beauty Of Budgeting.

RELATED FAQS
  1. What is the most effective way to write a successful budget?

    Learn the best way to create a successful budget. Learn how to cut unneeded expenses without impacting what you need for ... Read Answer >>
  2. What are the benefits of prorating expenses?

    Understand what prorating expenses means for sole proprietors and entrepreneurs. Learn about the benefits of prorating expenses ... Read Answer >>
  3. Why should I bother creating a budget?

    Creating and using a budget is a valuable tool for all demographics; it's not just for those who need to closely monitor ... Read Answer >>
  4. Why should I invest?

    One of the most compelling reasons for you to invest is the prospect of not having to work your entire life! Bottom line, ... Read Answer >>
  5. What is the difference between capital and operating expenses?

    Learn about the types of expenses that a company incurs. Understand the difference between capital and operating expenses, ... Read Answer >>
  6. How do I retire?

    When considering how to plan for retirement, firstly think about the age at which you want to retire and the lifestyle you ... Read Answer >>
Related Articles
  1. Savings

    I Make $50K a Year: How Much Should I Invest?

    Find out how much to invest each year if your annual income is $50,000. The key is knowing the final benchmark for your retirement goal.
  2. Investing

    Explaining Clients Why They Need a Budget

    The truth is that budgeting isn't just for times when your money is tight or your life is undergoing a major transition. Budgeting is for everyone, rich and poor alike.
  3. Budgeting

    The Complete Guide To Planning A Yearly Budget - The Importance Of Yearly Budgets

    A yearly budget is a summary of all the money you expect to earn and spend during a 12-month period. Because budgeting involves number crunching and making projections, many view the process ...
  4. Budgeting

    The Complete Guide To Planning A Yearly Budget - Creating A Yearly Budget

    There are a number of ways that you can approach a yearly budget. Some may prefer to add up all income for the year and all expenses for the year, and divide each category by 12 to come up with ...
  5. Budgeting

    The Complete Guide To Planning A Yearly Budget - Making Budget Projections

    The best yearly budgets are well thought out and accurate, providing a realistic view of your finances for the next year. If you write down that you are going to spend $100 a month on groceries, ...
  6. Budgeting

    Budgeting Basics - What Is Budgeting?

    By Amy FontinelleMany people think of budgeting as something to do when they're short on cash. College students might turn to a budget to figure out how to make due with their high expenses and ...
  7. Options & Futures

    Top 5 Budgeting Questions Answered

    You don't need a degree to understand your money, begin saving and pay down debt.
  8. Budgeting

    Budgeting Basics - Goal Setting

    By Amy FontinelleAn important part of effective budgeting is setting goals and using your budget to help you achieve them. Your goal might be as simple as saving up enough money for tickets to ...
  9. Budgeting

    Budgeting Basics - Setting Up A Budget

    By Amy FontinelleNow you know why having a budget is so important. It can help you: Make long- and short-term projections about your financial situation. Avert a financial crisis. ...
  10. Options & Futures

    10 Simple Steps To Financial Security Before 30

    Find out how to reach your long-term goals without becoming a tightwad.
RELATED TERMS
  1. Personal Spending Plan

    Similar to a budget, a personal spending plan helps outline where ...
  2. Net Premium

    The expected present value of a policy’s benefits less the expected ...
  3. Retirement Planning

    The process of determining retirement income goals and the actions ...
  4. Deductible

    1. The amount you have to pay out-of-pocket for expenses before ...
  5. Household Expenses

    A per person breakdown of general living expenses. It includes ...
  6. Budget

    An estimation of the revenue and expenses over a specified future ...

You May Also Like

Trading Center