I have another guest post for you today.  It’s from Miranda over at Yeilding Wealth.  Her post is about prioritizing your budget.  I agree that this is a very important step in budget building and it often goes overlooked.


Prioritize Your Spending

We regularly hear about making a budget, and how important it is to stick to one. However, a skill that we often do not really hear much about is prioritizing our spending. It’s just sort of assumed that if you make a budget, your spending is prioritized. But this is not the case. Indeed, prioritizing your spending is the first step in making a budget.

Wants v. needs

One of the first things to figure out when prioritizing your spending is the difference between wants and needs. Needs include such items as food, basic clothing and shelter (housing)/bills. I also like to think of an emergency fund and a retirement account as needs as well. Wants include such items as entertainment, expensive food and clothing and to some extent, a car. If you live where there is inexpensive and reliable public transportation to get you to and from work, a car is probably not strictly necessary.

The key to making a budget is prioritizing your spending so that the most important needs are taken care of first. My prioritized spending list may look something like this:

1. Mortgage
2. Groceries
3. Retirement
4. Bills
5. Emergency fund contribution
6. New shirt for my son
7. Recreation
8. Entertainment (especially dining out)

If my expenses look as though they are going to run over my income, I can drop the bottom expenses off the list. I can even tweak my emergency fun contribution if it becomes necessary.

Prioritizing debt

Another priority that needs to be addressed is the type of debt you have. This is becoming a concern as more people pay their credit card debt even before their mortgages and car payments. When you are prioritizing your debt payments, it is important to pay those items that are secured by something — such as a home or a car — before you pay your unsecured credit card debt. Creditors may yell the loudest to get you to pay, but you can lose your house if you do not make your mortgage payment. It is true that credit card companies can make things difficult in terms of your credit score, but they can’t take your home or (in most cases) your car in order to settle your account.

One of the most important personal finances skills in understanding how to prioritize your spending so that you make sure that the most important items are paid for.

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