You might think you understand what short-term and long-term goals entail, but it can be easy to confuse and overlap the two without proper budget planning and financial management. For both, you need to do a long-term budget and a short-term budget. You can’t rely on a one-time short or long-term budget because life changes through different stages, and you need your finances to adapt to those changes.
Let’s understand how to distinguish between long and short-term financial goals and how to create a short-term budget and a long-term budget.
What Are Short-Term Financial Plans/ Goals?
Short-term financial goals are those you can fulfil on an immediate basis or within the span of 1 to 3 years. For short-term goals, you require money more readily and often unexpectedly. Short-term goals usually include goals like:
- Buying food/ utilities
- Paying rent/ maintenance
- Paying off credit card debt
- Paying off a monthly EMI/ loan/ insurance
- Buying personal items
- Travelling to a city, state, or country
- Home repair/ maintenance
- Medical/ personal emergencies
Long-term financial goals are those with a longer timeline. Long-term goals often take anywhere between 5-20 years to achieve. Even though they require consistent savings in the present, you can fulfil them at your own pace. Long-term goals often need a large sum of money and are well-thought-out and pre-planned. These include objectives like:
- Marriage of you/ a child
- Higher education
- Buying a home
- Paying off a debt/ mortgage
- Accumulating wealth for retirement
Apart from short and long-term goals, there are mid-term goals as well. These goals depend on the pace of the individual and their timeline. They include goals like buying a vehicle, getting married, paying debt repayments, home repairs, etc. Even medical and other personal emergencies like accidents, job loss, and other such eventualities are unpredictable and though often not goals, require the breaking of an emergency fund. So, an emergency fund can be a short-term or long-term goal, as per the scenario.
The long and short-term budget meaning depends on the goal in sight. Developing a short-term budget and long-term budget might have the same outline, but the nuances will differ. Here is how you can go about budgeting for short and long-term aims.
- Identify the goal and approximate its timeline.
This is the foremost step of budget planning. You first need to define the goal and figure out whether its timeline will make it short or long-term. Goals don’t have a one-size-fits-all timeline, but you need to earmark a realistic timeline for yourself. For instance, marriage might be a short-term goal to be fulfilled within 1-3 years for someone but might be a long-term goal for you.
- Figure out how much money you will need for the goal.
Once you list your short and long-term goals separately, you need to assess how much you will approximately need to achieve them. You can get insight from communicating with your near and dear ones, conducting financial research online/ offline, or talking to an experienced financial advisor to get a clear idea of how much money you will require for each goal.
- keep track of your spending habits.
This is one of the most crucial features of a budget. The fulfilment of your goals depends on your monthly/ yearly income and how you spend over the years. Tracking where your money goes helps you separate your needs from your wants. It is also an important pre-step to the proactive part of executing a short-term budget and long-term budget.
- Develop a practical plan to fulfil the budget for those goals
Once you start tracking your expenses, you can move to the actionable part of budgeting. Both short and long-term goals require money. And it is essential to ensure that your money does not remain static – that it grows and gets allocated to various profit-making assets. Here is how to execute a short and long-term budget.
To make your short and long-term goals a reality, you need to start allocating your money towards saving avenues. But how much do you save? You decide this based on how much you require for a specific goal in consultation with a financial advisor.
Or you can follow the 50-30-20 rule at first and earmark 20% of your monthly earnings towards saving. For short-term goals, you will need immediate cash. So you need a savings or checking account that will give you instant access to cash. You can also open a fixed or recurring deposit for short-term goals that require a few months.
Budgeting will only work if your income does not remain stagnant and grows through the years. This is why you need to explore various investment options. Investing will help you grow your money by giving you interest-based compounded returns. These investment plans have varying interest rates in India, depending on whether they are linked to the capital market or not.
An important part of budget planning in India is insurance, especially life or term insurance. An insurance policy can help you secure your loved ones in your absence or during life-altering contingencies that threaten to stop your short and long-term goals.
- Contingency/ emergencies
One of the most vital aspects of budget planning is to account for unexpected emergencies. These majorly include health-related emergencies, employment or job loss, mental distress, family disputes, and any other eventuality that requires immediate cash. Keep aside an emergency fund that you contribute to every month. An emergency fund should at least get you through six months to one year without any active income.
Long-term budgeting often includes retirement planning. To ensure you live a stress-free post-working life, you must be active in finding and investing in retirement plans in India. Retirement plans help you multiply your money and build a secondary income for your golden years.
Budgeting for short and long-term objectives starts with identifying your visions for life and continues with engaging in active ways to realise those. A good part of budgeting requires regular tracking of expenses, allocation/ diversification of assets, and thinking of the near and big picture. Reach out to the Tata AIA life insurance company for various life insurance and retirement plans for efficient budget planning for short and long-term purposes.