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 its is 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. How soon should I start saving for retirement?

    The best answer to the question, "How soon should I start saving for retirement?", is probably, "yesterday," and the second ... Read Full Answer >>
  2. How are spousal benefits calculated for Social Security?

    The amount of your Social Security spousal benefit depends on a number of factors, including your age, the maximum amount ... Read Full Answer >>
  3. Are Social Security benefits adjusted for inflation?

    Social Security benefits are adjusted for inflation. This adjustment is known as the cost of living adjustment (COLA). For ... Read Full Answer >>
  4. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  5. How does a bank determine what my discretionary income is when making a loan decision?

    Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
  6. What is the range of deductibles offered with various health insurance plans?

    A wide range of possible deductibles are available with health insurance plans, starting as low as a few hundred dollars ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Calculating the Margin of Safety

    Buying below the margin of safety minimizes the risk to the investor.
  2. Retirement

    Strategies for a Worry-Free Retirement

    Worried about retirement? Here are several strategies to greatly reduce the chance your nest egg will end up depleted.
  3. Professionals

    How to Build a Financial Plan for Gen X, Y Clients

    Retirement is creeping closer for clients in their 30s and 40s. It's a great segment for financial advisors to tap to build long-term client relationships.
  4. Investing Basics

    If You Had Invested Right After Amazon's IPO

    Find out how much you would have made if you had invested $1,000 during Amazon's IPO, including how the power of the stock split affects investment growth.
  5. Home & Auto

    4 Areas to Consider Roofing Material Types

    Roofing your home is very important, that’s why you should choose a roof specifically designed to handle your area’s climate.
  6. Professionals

    Top Retirement Hack? Start with a Lifestyle Change

    Instead of going through the usual retirement planning steps, some people are focusing on fostering a lower cost lifestyle from the start.
  7. Professionals

    Holding Out for Capital Gains Could Be a Mistake

    Holding stocks for the sole purpose of avoiding short-term capital gains taxes may be a mistake, especially if all the signs say get out.
  8. Retirement

    The Least Expensive States to Retire In

    Retirement time, and the livin' is easy in these locales.
  9. Retirement

    Yes, You Can Manage Your Own Retirement!

    Discover how to get started planning for and managing your retirement by making simple, deliberate steps towards financial health.
  10. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Biotech Sector

    Learn about the top biotechnology ETFs, such as the SPDR S&P Biotech ETF, the First Trust NYSE Arca Biotech ETF and the iShares Nasdaq Biotech ETF.
RELATED TERMS
  1. Passive Income

    Earnings an individual derives from a rental property, limited ...
  2. Internal Rate Of Return - IRR

    A metric used in capital budgeting measuring the profitability ...
  3. Dynamic Updating

    A method of determining how much to withdraw from retirement ...
  4. Possibility Of Failure (POF) Rates

    The likelihood that a retiree will run out of money prematurely ...
  5. Safe Withdrawal Rate (SWR) Method

    A method to determine how much retirees can withdraw from their ...
  6. Warren Buffett

    Known as "the Oracle of Omaha", Buffett is Chairman of Berkshire ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!