Cash Budgets & Long-Term Financial Planning


Your financial plans have to consider both the future and the present. For the present, you need enough cash available to cover your bills and other spending. Your long-term financial plan prepares you for retirement, your kids' college education or a big dream purchase. Putting money every month toward your current budget and your long-term goals is the ideal.

A good financial plan can help you save the down payment on your house.

Use Budgeting Software

Software that lets you track assets, liabilities, income and expenses can be a big help to figuring out your short-term budget and long-term plans. You can enter your past expenses, according to John A. Phillips, CPA, to help project your future. "Having historical income and expenses (at least a year) would be helpful in creating the budget as certain expenses can vary depending on the time of the year," Phillips says. "Seeing how money was spent is helpful in determining what will be needed in the future and if there is spending that can be cut if necessary to meet the long-term or short-term objective of the budget."

Define Your Long-Term Goals

Different goals call for different financial plans. If, say, you want to buy your next car with cash, you have to save up several thousand dollars. If what you want is to buy a house, you probably need to save a lot more. "If the goal is to purchase a house within the next five years," Phillips says, "at least one-fifth of the projected down payment and closing costs needs to be set aside each year."

Set a Livable Cash Budget

When setting your current cash budget, it helps to compare your spending and your income. "If the minimum budgeted expenses exceed income, there are two choices," Phillips says. "Increase income by taking a second/part-time job or reevaluating your expectations on spending." In the second option, you have to look at which expenses you can eliminate. For example, you can bring lunch instead of eating out and avoid stores where you splurge compulsively. If your spending is less than your income, you can figure how much of the extra to set aside for your long-term goals.

Balance Long- and Short-Term

Once you know your goals and your current expenses, you can set up a long-term financial plan. The more your spending falls under your income, the more you can save for the future. Phillips says it's important that you include an emergency fund along with saving for goals. That way if you have an unexpected bill such as a big car repair, you don't have to tap your house fund or college savings for it. If you're self-employed, Phillips adds, it's also important to budget for quarterly estimated-tax payments to the IRS.

Control Your Use of Credit

With a credit card, it's always easy to spend when you don't have the cash. Phillips says that's a reason to use credit sparing: "Young people -- and older people also -- have a tendency to overutilize credit, living beyond their means, and [they] end up seriously in debt." The simplest solution, he says, is to only use your card if you know you can pay when the bill comes in.

Decide What to Do With Your Money

You can put all your money into one account, but there are advantages to separating money for current bills from money for the future. Money you use to buy groceries and pay bills should be in an account you can access at any time, whether by check, debit card or ATM. Money you won't need for several years down the road is better off deposited somewhere with a higher rate of interest. If you can't tap the long-term account easily, that's actually a plus.

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