Budgeting basics – Part I – Establishing goals

This is the first in a four-part, four-week series on creating and using budgets.

Most people have a pretty good idea of how much they earn and how much they spend, and if you ask how much people have in their bank accounts, they can usually tell you. But few people really know where they spend all of their money, and fewer still have a method in place that allows them to keep track of the amounts they expect to earn, spend, and save for the long-term.

A budget provides you with knowledge of your current financial picture, as well as guidance for achieving short- and long-term financial goals so that you can meet life’s obligations without panic and without the need to dramatically alter your standard of living.

A budget also provides you with a playbook for the future, so that when you get a raise, a new job, or an unexpected influx of cash, you know exactly how you can best utilize that money so that you meet your goals. The reason you take the time to make a budget is so that you always have a handle on your personal finances and so that you can make sure you have enough money for the things you need and want.

Here are some tips for creating a budget that is flexible enough to meet the changes you encounter in life and durable enough to meet a lifetime of financial goals. A budget

Budgeting basics, part one:
Establishing goals
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is not difficult to make and it’s not difficult to follow. In fact, people who use budgets find they can comfortably talk about their finances and their financial goals because they have a thorough knowledge of what they can actually achieve.

Step 1. Assess Your Goals

You might think that the first step in creating a budget is to get some paper and write down everything you earn and everything you spend. Although you can be sure that’s part of the budget-creation process, the first step is to determine your personal financial goals.

If you are single, your goals are your own. If you have a family, be sure to sit down with the entire family and discuss everyone’s personal goals. Don’t be general; be very precise when you describe the goals, and don’t forget to investigate the actual cost of these goals. For example, don’t just say that someday you want to provide a college education for your child. Say you want to be able to afford to send your child to the state university, and you'll need to start paying for tuition in 2015, and you estimate you will need to provide $10,000 per semester to cover all the costs.

Don’t set financial goals that are completely out of reach but at the same time, don’t ignore your needs and desires.

Be sure to include among your budgeted items an emergency fund that provides a cushion for unexpected events, such as a job layoff, sickness, or repairs. Ideally, an emergency fund includes at least three, and as much as six, months of income. If you use some of the money in your emergency fund, be sure to replace the amount as soon as possible.

The financial goals that you put on your list include a lifetime of expectations. Don’t just list the items you hope to acquire and achieve in the next five to ten years. You need to think about what you want to achieve for the rest of your life, because there are many long-term goals that can’t be reached without long-term plans. For example, if it’s important to you to be able to own a house outright without any mortgage by the time you’re age 55, you can’t wait until you’re 54-years-old to figure out how you can accomplish that goal.

Remember that the creation of a budget is a family process and that the financial goals of all family members are to be taken seriously. Everyone has different desires and no one deserves to be ridiculed about what he or she feels is important. Everyone in the family has the right to include his or her personal goals in the budget plan, and the initial session is one in which no one holds back. Even if a goal seems unreasonable or unreachable, state the goal and consider its cost. Only when all the goals have been announced and discussed are you ready to move on to the next step.

Step 2: Categorize Your Goals

Now that you have a wish list of all the things you hope to be able to accomplish financially in your life, it’s time to break that big list into smaller lists. Place these headings on four separate pages:



Short-term goals


Medium-term goals


Long-term goals


Bonus goals

List each one of the goals from your planning meeting on one of the four pages, in the place where the goal is most likely to fit. Be sure to include the estimated cost of each financial goal on your lists. As you prioritize, remember that everyone in the family may have different ideas of the importance of each goal. What is a necessity to one person is a luxury to another. Here are some general guidelines to help you determine which types of financial goals might fall into each category, but you have to decide for yourself which goals take priority and when you expect to achieve your goals.

Short-term goals are goals that you expect to meet within one to five years. These goals might include a new car, the down payment on a house, the cost of the addition of a new baby to the family, vacations, summer camp, private school, musical instrument lessons, life insurance, and the creation of a household emergency fund. Many of the short-term goals will seem more like requirements than dreams.

Medium-term goals are goals you expect to meet within ten years. These goals might include the purchase of a larger house or the cost of improvements to your current house, foreign travel, college, a new car, furniture, a vacation home, and a wedding.

Long-term goals are the goals you expect to achieve in more than ten years. These goals might include the launch of your own business, financial aid to your children, retirement, care of an elderly parent, travel, medical expenses, and nursing home costs.

Bonus goals are those goals that you want to achieve but that you can’t count on based on your current financial situation. These are goals that may seem out of reach at this point in your life but that may become reachable goals if your financial circumstances change over the years from your current expectations. Goals in this category might include extensive travel, a mobile home, large charitable donations, and so on.

By Gail Perry, CPA - AccountingWEB Managing Editor
Next week: Budgeting Basics, Part II: Creating Your Budget

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