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