By: Maurine Anderson
Prioritizing expenses can be one of the hardest aspects of budgeting. How do you decide where to allocate your money first? Which expenses can or should you choose to forego?
Many smart budgeters live by the mantra ‘pay yourself first’. The phrase ‘pay yourself first’ refers to putting money into personal savings, such as your retirement fund, emergency fund, and any other savings funds you might have going (money for a down payment, for example). Beyond savings, however, there are other important expenses to worry about—credit card debt, student loans, mortgage, car payments, and monthly bills, just to name a few.
So how do you decide which expenses get the highest priority in your budget? Here is a look, in order from highest priority to lower priority, at the top expenses you should be prioritizing in your budget.
First, it’s important to lay out what your non-negotiable or fixed expenses are. This includes items such as:
- Rent or mortgage
- Healthcare (often taken out of your paycheck, but don’t forget copay and deductibles)
- Car insurance
- Gas or public transportation
- (Internet access)
- (Cell phone bill)
Items like gas and groceries can vary from month to month, of course. Try to get a good idea of what you’re spending on average in each of these categories every month, and decrease your spending here by cutting out splurges (e.g., junk food) if necessary. In addition, some things that might be non-negotiable for one person might be considered superfluous for someone else. Expenses like Internet access and your cell phone bill, for example, are not quite as non-negotiable as things like rent and mortgage, but for many people, these things are highly important for everyday living. Take a good look at what is vital for your everyday living to determine what your non-negotiables are.
It’s also important to keep in mind that not all non-negotiable expenses will remain fixed throughout the year. Utilities, for example, can vary from season to season.
Once you have your non-negotiable expenses settled, you should absolutely consider funding your retirement. It may sound odd to prioritize your retirement fund so high, but keep in mind that while entering retirement voluntarily is the ideal, it is not the reality for many. Job layoffs, age discrimination against older employees, health issues, and family obligations can all keep a person from working into their 70s.
Another major reason you should prioritize retirement is that many employers are willing to match 401k contributions. Some will match 50 cents for every dollar up to a certain amount every month, while other employers will match every dollar contributed up to a certain percentage. Is possible, you should strive to take full advantage of employee matching because it is essentially free money. In other words, you’re guaranteed a return on your investment.
Credit Card Debt
Next, you should absolutely resolve credit card debt. Paying off credit card debt is another area where you are guaranteed ‘return’, as future interest no longer becomes an expense. In other words, the sooner you resolve your credit card debt, the less you will end up paying in the long run.
One exception here involves ‘strategic debt’. There may be advantages, for example, to making the minimum payment every month on a low-interest, tax-subsidized mortgage or student loan. This, however, is something you should discuss with a financial adviser.
Then there is your emergency fund. Many people try to go without one, only to find themselves between a rock and a hard place when an unexpected expense hits—a car repair or medical bill, for example.
The purpose of an emergency fund is to allow you to continue living your everyday lifestyle (even if it’s somewhat restricted) when a major unexpected expense or sudden dip in income hits. Ultimately, an emergency fund should be able to protect you in case of job loss. Your goal for your emergency fund should be to establish a fund that will cover at least three months’ worth of your typical expenses; six months’ worth is even better.
Other Savings Funds
Finally, you have your other savings to consider, such as savings for college, a new car, a down payment on a new home, etc.
If any of these other savings funds is to be prioritized, it is the down payment for a home. This is because your home is likely the biggest investment you are going to make in your life, and how much money you put down will affect your monthly expenses significantly for years to come. In fact, as this article details, there are several money-saving advantages to putting 20% down on a home. So before you consider any discretionary spending, be sure to think about your ‘down payment fund’ and other savings funds first.
Finally, you have those discretionary expenses. It’s nice to allocate some money for discretionary spending every month, but you should strive to maintain a habit of covering all other priority expenses first before making any discretionary expenses. Examples of discretionary expenses are:
- Eating out
- Cable or movie streaming subscription
- Gym membership
- Hobbies (photography, skiing, rock climbing, etc.)
- Spa treatments