I read an article recently where someone described how they set their budget 3-years out into the future. I can’t remember exactly where it was, so I can’t link to it. What struck me about that, is there are a lot of unknowns that go into planning that far out. Don’t get me wrong, I plan for my future as well. I just don’t budget my food and other expenses for 3-years into the future. I do analyze things on three basic time horizons: short, medium and long.
I will start by discussing my long-term items. The biggest by far is retirement. In trying to figure out a retirement number, I have to make a number of assumptions. Assumptions such as how long will I work, what my level of pay will be in the coming years and what can I expect for an investment return. All of these can have a significant impact on my savings estimate. The other item in my long-term budgeting is college tuition for both of my children. Since my oldest is 6-years old, I still have quite a bit of time before the expense comes about, but I have already started planning. Retirement savings are built into the short-term budgeting, while the college savings will begin in a few years. Since my wife currently stays at home with our children, our plan is for her to start working once they are both in school. Most of her earnings at that time will be used for college savings. The rest will be used for retirement and income taxes.
In this category, I think of things coming in the next 5-years. For us, there is only one thing that fits into this category, a Disney vacation. Our kids are 2 and 6 right now. In 5 years, they will be 7 and 11, which we feel would be a perfect time to take them. Since we know the trip will have a significant cost, we are trying to set up a plan now to pay for it in 5 years. We have received some money this year via an inheritance and we have allocated some of it for the Disney trip. We figure the remaining amount we can save by using a portion of my annual bonus every year for the next 5 years. This should allow us to enjoy ourselves on the trip and not have to worry about how we are paying for it.
The short-term budgeting is all about the day-to-day expenses to run our household. The only time it changes is when there is a change in income. A salary raise is usually what triggers a change in the budget. I usually already know if there are any changes to expense categories that need to be made. Since I track all of our expenses, I know if any category is trending above our budgeted amount and needs to be revised. For example, with 2 growing kids, I have noticed that our food expenses have been trending upward the last few months. Nothing too dramatic, but on average it’s probably $25 to $30 or so more a month. Once the next salary adjustment comes in, I will revise our food budget to take this into account.
Adding it All Up
Those three time horizons make up our monthly budget. It encompasses our day-today spending, as well as our long-term savings goals. This way we plan for our future, but are also able to enjoy our present. How do you think of your budget?