Budgeting is an important aspect of your finances that will help keep yourself from making a lot of mistakes in your life. We all have goals and dreams and when you know how to budget, you can plan your finances so that it can support their fulfillment.
All budgets must contain your income and your expenses to determine their activities over a specific period. However, you need to be careful about the type of budget that you will implement in your life. Investopedia.com provides three different types of budget.
Surplus budget – this is the budget that have enough left after all the priority expenses are satisfied.
Balanced budget – this implies that the income and expenses are equal – leaving you with no extra money at the end of the budget period.
Deficit budget – this is the type of budget wherein your expenses exceed your income. This type of financial condition usually result in debt.
Obviously, you want to have at least a balanced budget in order to keep your monetary activities from ruining your financial standing. However, if you want to ensure that you can reach your life goals, you need a surplus budget to have enough money to save for that goal.
Life goals you need to include in your budget
We all have various life goals and it varies depending on our priorities. Sometimes, we all have the same items on our list but in most cases, the ranking of priority is different. Here are three different life goals that most people usually have on our list of goals.
When you are in debt, it becomes one of your priorities in life. Debt is one of the things that can really destroy your life and if you don’t do something about it, that can really compromise your future. Although there are various ways to get out of debt, a budget plan should be among one of them. It is the first that you will create in order to help choose the right debt relief program that will get you out of debt. It is important that you can define how much you can contribute towards your debts on a monthly basis. You need to choose based on what program you can afford. When you have your debt payments in your budget, you can ensure that it will always be funded.
Another life goal that we usually want to reach is having our own home. Again, the main role of budgeting is to ensure that you can save up for your home. Just as this plan can help you put aside an amount that will grow your funds to afford at least the down payment of your home. Your budget will help you calculate how much you can afford to put aside for your monthly mortgage payment. That will help determine the value of the home that you can afford to pay for. You can shift your expenses and determine how much you can sacrifice in order to afford the home that you want buy.
The last life goal that we will discuss is your retirement. This mostly involves growing your savings. Just like in your home goal, you can include in your budget the amount of money that you need to put aside for your retirement. The amount actually depends on the age that you want to retire and when you started to save up for your retirement. If you need a big retirement contribution because you started late, your budget will allow you to easily choose which expense you can let go to make room for this savings.
Tips to create a long term budget plan
The thing about this entry in your budget is it will be a long term budget plan. Although it will be part of your overall budget, it will be different from your daily expenses because the culmination of the goal will not come immediately. If you are confused about how you can do this, we suggest that you get an online budget planner that will serve as your template as you create your budget plan. We have a free budget planner worksheet on this site that will help you get started on budgeting.
To help you further, here are some of the things that you can do to make a long term budget plan.
Consider your short term goals. Your long term will be supported by the short term so make sure that they are aligned properly. Once you have an idea about what you spend daily, you will have a hard time determining the amount of money that you can afford to put aside for the long term.
Consider the lump sum payments that you make. Sometimes, we only focus on the monthly amount and forget about the annual or quarterly expenses. Do not ignore the once a year costs that you make like your property taxes or other things that you have to contribute on.
Include the daily and pro-rated annual expenses, add them and subtract the sum from your income. Whatever is left will be the amount that you can put aside for your life goals.
Plot all of these detail in your budget plan to ensure that all of them will be funded consistently and regularly.
Of course, you need to ensure that you are not forgetting your emergency fund. While your life goals are important, make room for the unexpected expenses. Otherwise, you will end up spending what you saved up for your life goals when an emergency strikes. If you do not have this, make sure you save up for it first before you really concentrate on your other goals. When you have saved up enough amount, that is when you can pool in your resources for your life goals.
Here is a video that we created to help you learn how to budget for your household.