The first step in setting long-term goals is to determine how much you spend on short-term expenses. Once you know how much money you need for the here-and-now, you can assess how much you can put into investing for your future.

Regular monthly expenses such as cable and cellphone bills are easy. But don't overlook less frequent expenses like insurance co-pays and vacations.

These lump sums can be prorated over a number of months. For example, if you're creating your budget in December and you know a $2,000 insurance premium is due at the end of next October, put aside $200 per month for the next 10 months.

Key Takeaways

  • List all of your routine non-negotiable expenses.
  • The amount of your income that's left is available for investing in your future.
  • Set down your goals with an estimate of their costs.
  • Choose investments that will help you get there.
  • Figure out how much you need to put aside monthly.

This is a good way to take care of occasional expenses large and small, such as family gifts and charitable donations.

After you determine your monthly expenses, including those pro-rated annual expenses, subtract the total from your monthly income. That's how much you can devote to meeting your long-term goals.

Defining Long-Term

For most of us, a long-term goal is anything that is more than one year in the future and isn't a routine expense. It could be buying a home, sending a child to college, or planning for retirement.

Your long-term goals should come with a solid cost estimate. Start by writing down several long-term goals along with a best guess of how long it will be before the money will be needed.

A sample list might look something like this:

  • College expenses: Child 1 (current age 8); $25,000/year for four years beginning in 10 years
  • College expenses: Child 2 (current age 3); $27,000/year for four years beginning in 15 years
  • New car purchase: $30,000 in two years ($4,000 upfront + $400/month for seven years)
  • European vacation: $6,000 for a two-week vacation within three years

Once you've jotted down your goals, you can use a spreadsheet or other software program to figure out how much you need in total.

The next big step is identifying investments that will help you get to these goals in the time frame you've set while still matching your personal risk tolerance. Historical asset returns can be used to estimate how much the investments will hopefully appreciate in the time frames you've set.

Adjusting the Numbers

Using the spreadsheet, you'll be able to determine how much you have to save monthly in order to achieve each of those goals.

If the numbers don't work, you need to adjust your goals, cut your expenses, or earn more income.

And remember, your circumstances will change. When you get a raise or some new expense comes out of the blue, revise your plan to reflect it. That's vital to keeping on track to meet your goals.

Advisor Insight

Nick Bradfield
Divvy Investments, LLC, Cary, NC

I think a lot of people overcomplicate budgets and the term budget is perceived as a bad word, like the word diet. Being on a budget doesn't mean you can't have things, it means you know where your money is going. The key, like dieting, is to not yo-yo back and forth between good and bad habits. And you have to include some fun things in your budget or it won't last long. It won't become a habit. Here are four steps to a budget you can keep:

  • Record all of your spending for 30 days.
  • Review fixed expenses. Can any be removed or renegotiated?
  • Review variable expenses. Can any be removed or reduced?
  • Reallocate any new-found funds to your biggest priorities.

Rinse and repeat the above periodically.