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 >>
Related Articles
  1. Financial Advisor

    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.
  2. Managing Wealth

    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.
  3. Personal Finance

    This Is the Year to Start Budgeting

    Whether your issue is credit card debt, student loans (or the fact that Social Security isn't rising next year), it's time to learn how to build a budget.
  4. Trading

    Top 5 Budgeting Questions Answered

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

    Five Rules to Improve Your Financial Health

    Learn five broad personal finance rules that can help get you on track to achieving specific financial goals.
  6. Investing

    10 Simple Steps To Financial Security Before 30

    Find out how to reach your long-term goals without becoming a tightwad.
  7. Managing Wealth

    6 Financial Lessons to Master by the Time You're 30

    Once you hit your 30s, it is time to get serious about your finances and money skills. Here are the top money lessons you need to master this decade.
  8. Retirement

    Enjoy Life Now And Still Save For Later

    Find out how to balance living well today and retiring well tomorrow.
  9. Managing Wealth

    How to Create a Budget With Your Spouse

    Learn how to create a budget with your spouse, whether you're a newlywed or you've been married for decades.
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. Operating Expense

    A category of expenditure that a business incurs as a result ...
  4. Retirement Planning

    The process of determining retirement income goals and the actions ...
  5. Expense

    1. The economic costs that a business incurs through its operations ...
  6. Financial Health

    A term used to describe the state of one's personal financial ...
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center