Multi-Year Budget Preparation

To help create the most effective multi-year budget plan, list your long-term goals, including the amounts and target dates. Without an actual budget, these projections will just be best guesses, but they’ll help guide you in your budget-making process. Include long-term goals such as retirement savings, house down payment, paying off student loans and credit card debt and saving for a kids’ college fund.

Determine what monthly amounts you’ll need to budget to accelerate student and car loan repayments, credit card debt payoff or mortgage reduction. Use an online retirement calculator or meet with a financial adviser to help you determine how much money you’ll need to have saved by the time you retire to live the lifestyle you want. For example, if you want to retire when you’re 65 and live on an annual income equal to $100,000 in today’s dollars, you’ll need to project your monthly savings based on your current assets, projected Social Security benefits and adjustment for inflation. For most people this requires using a retirement calculator or a financial adviser.

Create a budget for one year; you can use this document to copy the first-year budget and use it as a starting point for future years. List your expenses in two categories: fixed expenses you must pay each month and discretionary expenses you can cut, if necessary. You can also list your expenses as variable and fixed, depending on whether the amounts change each month or stay the same, to help with cash flow planning.

Create a separate document tied to your budgets called a balance sheet. This is a dynamic list of your assets and liabilities that changes as you make purchases and pay off debt, giving you an accurate picture of how your budgeting affects your net worth. For example, if you charge $5,000 worth of expenses one year, but won’t pay them until next year, your net worth decreases by $5,000 in the year you make the charges, but will increase the next year as you pay off the debt off. An annual budget might show only expenses one year and payments the next, but a balance sheet tracks both in real time.

A cash flow statement shows you when money arrives, rather than when you earn it, and when bills are due, not when you incur them. This will help you keep enough cash and credit available to pay your bills. Create a separate document tied to your annual budget that records income and expenses in the month they arrive and are due.

When you use credit, you record the expense in one month and the interest it generates in another. Some people make the mistake of double-recording credit purchases by placing the expense in the month the purchase is made, then recording the credit card payment in a later month. For example, if you buy $200 worth of clothing in July, you might pay off that expense by September, making two $100 credit card payments in August and September. Record only the $200 July purchase in your budget. If you carry $5,000 worth of credit card debt into the next year, you will need income from the new year to pay off last year’s debt. This means you will record the credit card payments for last year’s purchases, as well as interest earned, as this year’s expenses.

Tracking long-term savings from year to year gives you an idea of the big picture. For example, if you plan on saving $500 per month for a house down payment, your annual budget will show you have $6,000 in that savings category. In a multi-year budget, you carry that amount forward, showing you how much total savings you have for your down payment.