Oran Hall | Budgeting to achieve specific goals

As you plan to realise specific goals such as to buy a motor car or house, further your education, or plan for retirement, now is a good time to make a budget to help ensure that your goal becomes a reality.

There are good reasons you should make a budget, although a budget is just an estimation of your expected income and expenditure, considering that there are several factors which can influence how much you earn and how much you spend. A price change, for example, can seriously alter how much is eventually spent to realise a goal.

Nevertheless, a budget should help you to have enough to make your desired purchase. Budgeting, then, goes hand in hand with goal-setting and helps you to see where your dollar goes.

It also enhances the making of good decisions. However, because life is littered with uncertainties, it is necessary to re-evaluate situations periodically and provide for contingencies.

When budgeting for specific goals, it is important to keep in mind all the expenses you are likely to incur. Let us look at purchasing a motor car, for example. Would it not be wonderful to only concern yourself with the purchase price? But there is much more.

I recall story a friend told me some time ago. His son believed it was time to own a motor car. Each time he raised the matter, his father suggested they calculate what it costs to own and operate one: maintenance, insurance, fuel, the fees the government charges. That was enough to shift the focus elsewhere.

BUYING A CAR OR HOUSE

If you are planning to buy a car, you would want to consider those costs, and debt servicing, too, if you choose to borrow.

What if you are considering the purchase of a house? The first big consideration is the deposit, which could be 10 per cent or 15 per cent of the price, in some cases. Then there are the closing costs – the related expenses such as legal fees, surveyor’s report fee and stamp duty. Like many house purchasers, you are likely to spend some money to make the house look and feel like your home. These enhancements, and required repairs sometimes, can be quite costly.

Then, after you move in, there is regular maintenance, and most likely repairs, to keep it looking and feeling like your home. Consider also the cost of insurance for both the building and contents. Consider, too, your monthly mortgage payments, unless your pockets are very deep and you are making a cash purchase. Bear in mind that mortgage rates may increase if interest rates increase, just as insurance rates may increase if the insurance company deems it necessary to raise them.

As for education, it is more than just tuition fees that must be considered. It is possible you may live away from your family home. In that case, consider the rent, and comfortable accommodation usually costs a lot. Take into account, too, transportation, meals, books, communication and other reasonable expenses necessary to make you comfortable. You will need some level of comfort to be able to learn well and to be able to complete the studies on time, in order to avoid other expenses that come into play with a delay in completion.

RETIREMENT

Let us go to the matter of retirement. Here, pension replaces pay. Expect a decline in your income, although the National Insurance Scheme (NIS) should provide some cushioning. You may also have some savings and investments, but, unless you have substantial capital, low interest rates will hardly give you a good income flow. It is quite possible that, in retirement, you could have less to spend.

On the spending side, you should generally know ahead of time how much it costs you to live. When you retire, some expenses may fall and some could be eliminated. However, brace and prepare for the increase in some expenses. Consider that health-related expenses may rise.

If you are in relatively good health, budget carefully to ensure you can accumulate funds to take care of higher health-related expenses in the future, if necessary. Additionally, consider that inflation will cause other expenses to increase over time. Use your budget to ease future pressures on your cash flow.

Ideally, you should be debt-free by the time you retire. If you receive a lump sum payment, evaluate the merits of reducing or eliminating your debts. By all means, avoid assuming new debt during your retirement years. Smart budgeting can help to make this possible.

You should have a comprehensive budget, but it can be so structured that you are able to see what happens in the various sections, such as motor car expenses and education. Compartmentalising your budget can help you see better where your money is going, and enable you to make corrections where you overspend.

Realising your most immediate and important goal may require casting your budget in such a way that more of your income is allocated to that purpose.

- Oran A. Hall, the principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel. Email finviser.jm@gmail.com