The Spending Plan - Setting & Prioritizing Budget Goals

Last week we visited The Spending Plan (aka your budget) and mapped the road to your budget goals. But how do you narrow down and determine which goals to make a priority and when? When the unexpected arises, how do you reprioritize? This week we take a closer look at your budget goals.

What are budget goals?

Think of your budget goals as your financial wish list and your spending plan as a way to make those wishes a reality. Without clear budget goals, your financial life may remain in disarray. Like any other goals in life, your budget goals help you turn your wish list into an action plan. Your budget goals also help you take the drudgery out of following the budget because now, when you give up any immediate desire, you know that you are one step closer to something you really want. For example, when you give up having dinner in a nice restaurant, you know that you are closer to being able to take a dream vacation next spring. With clear goals in sight, you can chart your course of action and change your direction when needed.

List & Divide up your goals according to how long it will take to meet

Setting your budget goals requires forecasting your future needs and dreams. Involve every member of your family and discuss each possible goal with them. Once each member has made the list, go over all the goals and see if you want to make any changes before you incorporate them into your budget.

Divide your budget goals into three categories: short-term goals (less than a year), medium-term goals (one to five years), and long-term goals (more than five years).

• Short-term goals are your immediate needs and wants, such as buying a dishwasher next month or buying a new car next year. Since these goals are, by definition, less than a year from being realized, they are relatively easy to estimate and plan.
• Medium-term goals are things that you and your family want to achieve during the next five years, such as taking a vacation to Florida or renovating your home. These goals require more planning and careful estimation of their costs.
• Long-term goals extend well into the future, such as planning for your retirement or for your child's education. These goals require the most planning, including estimating the cost, forecasting your income, and estimating the growth of your investments. You may need expert help to plan for these goals, and if so, then we are here to help you.

Estimate the cost of each goal

• Find out how much it costs today

Before you assign priority to your goals, it is important to determine the cost of each goal. The greater the cost of a goal, the more alternative goals must be sacrificed in order to achieve it. Though seemingly daunting, the task of determining the cost of your goals is not as hard as you might imagine. For example, to estimate how much your child's college education will cost, call a few college admission offices in your area or look at a college guide. 

• Project the future cost

For your short-term goals, inflation is not a big factor, but for your medium- and long-term goals, you need to factor in the inflation so that you have a more accurate estimate of their costs. Inflation can be a very tricky issue in dealing with long-term goals. Even a relatively modest inflation rate can increase the cost of your goal by 2½ times over a 20-year period. However, there is no need to panic, since time is also your ally. If invested properly, the money you will be saving toward that goal can also grow at a rate that will outpace inflation. We will talk more about compound interest this week.

• Calculate how much you need to set aside each period

Once you have some idea about the future cost of your goals, your next step is to determine how much you should put aside each period to meet all your goals. Keep in mind that you may not need to assign a separate savings or investment account for each goal as long as you have a method to keep a record of everything. You may want to have a separate investment strategy, however, for your short- and long-term goals.

Once you have calculated this number for all of your goals, you get an amount that you will need to save every month. 

Prioritize your goals

Prioritize those dreams! Unfortunately, for most families and individuals, it is not possible to realize all goals, which is why setting priorities is essential. Prioritizing also makes it easier to decide which path to take when life throws you a curveball.

Your first focus will be on the goals marked with a number one. Calculate the amount of money you will need to put aside each month to meet these goals. Do the same for goals with priority number two, followed by those for number three. You can then write your goal schedule.

Create a schedule for meeting your goals

List all your goals according to their priority. Then write down the amount of money needed, when you will need it, and how many installments you will need to meet your goals. With a clear picture of your goals, their priority, and the amount of money you need to attain those goals, you can really refine your spending plan or budget.

Nothing is out of reach with the right plan in place and a first step.