How can I budget for both short-term expenses and long-term goals?

By Ryan Barnes AAA
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. What is the best app to track my residual income?

    Learn about apps that help you manage and track your residual income whether you have complex portfolios with multiple investments ...
  2. Why doesn't Warren Buffett split Berkshire Hathaway stock?

    Understand Warren Buffet's fundamental approach to investing and learn why his basic investment strategy explains his no-split ...
  3. 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 ...
  4. What is the use of having revolving credit if your credit score suffers for using ...

    Is revolving credit right for you? The benefits greatly outweigh the risk when used responsibly, but it also has the ability ...
RELATED TERMS
  1. Warren Buffett

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

    Elder care, sometimes called elderly care, refers to services ...
  3. Gold IRA

    Definition of Gold IRA
  4. Through Fund

    A type of target-date retirement fund whose asset allocation ...
  5. Drawdown Percentage

    The portion of a retirement account that a retiree withdraws ...
  6. Debt Consolidation

    The act of combining several loans or liabilities into one loan. ...

You May Also Like

Related Articles
  1. Investing

    What Is The Real Picture Of Linn Energy?

  2. Retirement

    How To Start Saving For Retirement

  3. Retirement

    Financial Advisors Need To Seek Out ...

  4. Investing Basics

    Passing Boomers Will Leave A Big Economic ...

  5. Bonds & Fixed Income

    Why This Investment Will Remain A Boomer's ...

Trading Center