How to budget for short-term and long-term goals?
Do you plan on buying a laptop? Do you also wish to save for your child’s education? These are two different financial goals, and both require good planning and execution. This blog will discuss “How to Budget for Short-Term and Long-Term Goals”.
It is better to be aware of your financial situation and the different expenses that you incur to plan accordingly.
Budgeting helps to identify financial spending and understand how to allocate the leftover money to various needs for a better future. It encourages people to stay organized and appreciate the value of accounting.
- Steps needed to budget for short-term and long-term goals
Steps needed to budget for short-term and long-term goals
Step 1: Prepare for life’s contingencies
Life is unpredictable, and it is necessary to be prepared for any events that might set you back, like recession, job loss, illness, or even death.
Prepare for some of the contingencies with the help of insurance plans, for example, health insurance or Mediclaim plans are suited for illness and hospital bills, and life insurance plans like term insurance for financial assistance in case of death.
For a recession or job loss, you need to create an emergency fund where you put aside some money regularly. Automate these payments so that they can continue without any hassles.
Step 2: Define the financial goals
Identify both short-term and long-term financial goals so that it becomes easy to segregate them and make budgeting plans accordingly.
Short-term goals can be credit card payments, emergency funds, or personal expenses, whereas long-term financial goals often include retirement funds, a child’s education fees, and paying off the mortgage.
Define the financial goals and be specific with the goal, be it about buying a new house in 5 years your child’s education down the line, or a retirement fund?
Step 3: Prioritise the financial goals
Once you have defined and sorted out the financial goals, it becomes imperative to prioritize them. Consider the time you have in hand to meet them and how vital these goals are for yourself and your family’s future.
Step 4: Consider the timeline
By this time, you have identified and segregated the financial goals and have a few specific goals in mind. Think about the time in hand for instance, for the child’s education goal, you need nearly 10 – 15 years, but for buying a house, you need 5 years.
Step 5: Consider the money
The next question to consider is the money you will need to fulfill the financial goal, for instance, the estimated price of the house you want to buy (nearly INR 80 Lakhs) or the amount you want to save for the education corpus (nearly INR 60 Lakhs).
Step 6: Review all your expenses
Record all the spending for at least a month to know how much and where you have been spending. Review these expenses and identify which ones are necessary, which ones can be reduced and how much money you have left after meeting them.
Step 7: Set a savings target
The money must work for you and provide maximum advantage hence look for ways to save it. There are numerous short-term and long-term investment plans available in the market, like SIP, liquid funds, debt funds or PPF, etc.
Take the help of a financial advisor at Edufund to know more about short-term and long-term investment options.
Look at your total savings and make sure it accounts for everything from the contingency fund to the long-term and short-term financial goals.
The ideal ratio for spending and saving should be 50:50, but you can mold it as per your requirements up to 60:40. Any more spending will create worries hence try to maintain a balance.
Step 8: Divide the savings for important goals
Divide your savings for all the important goals. Prioritize necessary long-term goals like education corpus for the child, retirement plan, and necessary short-term goals like purchasing a home.
Now put the focus on comparatively less important goals like marriage, family vacation, home renovation, etc., and lastly, consider the short-term lifestyle goals.
Tips to make budgeting a success
- The premium of health insurance and life insurance policies must be on time. Automate the process from your salary account to avoid any discrepancies.
- Always keep the contingency fund aligned with current income and expenses.
- Club similar lifestyle purchases and expenses to get better value.
- Take the help of a credit card to pay for your expenses but pay back the amount within the stipulated time to avoid any charges.
It takes both planning and budgeting to stretch your money to the last unit and meet your financial dreams effectively.
Once individuals are aware of how to budget for short-term and long-term goals, then it becomes easy to manage their expenses and focus on spending that will have more value.