Because as every housewife knows, the first check you write is for the mortgage and the second is for the insurance.

Leigh Ann Tuohy, The Blind Side

One of the first steps in sound personal finance is understanding and exercising spending priorities.  This simple opening from the Blind Side illustrates a sound principle: pay for the roof over your head first, then pay for the insurance to protect the roof over your head.  In personal finance an appropriate modification would be to pay yourself first at least 10% of income, then the roof over your head etc.  Unfortunately very few people exercise spending priorities.  They treat their household budgets as ants treat food at a picnic, clamoring for every morsel until the meal is completely carried off.

I am amazed by the people that we have to evict from our properties, not because they don’t have the income, because they choose not to pay a portion of their income to keep a roof over their heads.  I am amazed by the people with mortgages who are paid on the first but who are constantly paying late fees to their lender because their mortgage payment is late. Financial stress is the number one reason for divorce, but if we dig a little deeper we would find that the number one reason for divorce is that the couple fails to develop and stick to a plan of spending priorities that makes sense.

Robert Kiyosaki revealed in Increase Your Financial I.Q. that it wasn’t until he and his wife hired a book keeper to whom they gave a set of non-negotiable spending priorities that included saving, that they realized how broke they were.

For far too many people, the pay check arrives and sensible priorities are drowned out by poor planning and apparent needs of the moment, the relatives, the car, the candlestick maker.

Oddly enough, spending priorities are a constant.  A quick Google search of the term “how to prioritize bills” reveals lists of spending priorities and they all look remarkably the same.

Bankrate and Smart Money offer priority lists.

Here is mine today:

1) Saving

2) Mortgage, taxes and insurance

3) Food and Gas

4) Utilities

5) Disability and Life Insurance

But this wasn’t always the case.  Years ago when my housing costs were  50% of my take-home pay, my spending priorities looked something like this:

1) Mortgage, taxes, insurance

2) Car payment

3) Food and Gas

4) Utilities

5) Disability insurance

6) Tithing

Everything else went on a credit card.  That included meals out, trips home and vacations.  Knowing what I know now, I would put saving at the top of the list and divide those funds into charitable giving and other discretionary spending as I do today and forget the credit cards. Yes, some money that I mark to be saved today is saved for immediate use, other money that I save is set aside for charitable giving and other money is set aside for capital investment.  Why bother to call it “saving” then?  Simple.  When ever I save something, I understand that I will use it later.

Saving is, by definition, deferred consumption.  Because I save with purpose, and don’t leave money sitting in my checking account where the ants can get at it, I will only release designated amounts for spending if the reason for spending is in alignment with the reason for saving.  When I come across something to buy, I ask one initial question of myself: “Is this an impulse buy?” If the answer is yes, the second question is “How are you going to pay for it?” (credit card is not a suitable answer).  If the answer is that I will use my savings account tagged for discretionary spending, I then ask “is there anything else on your purchase list of higher priority?” If the answer is yes then I ask if I can buy both.  If the answer is no, I don’t buy the impulse item.  If the answer is yes I will buy both.  As I write this I am chuckling to myself because I realize that this seems like a cumbersome system, but the reality is that this exercise only takes about 10 minutes for me to perform and I perform it faithfully.  Truth is that I am not cloistered in my home, I venture out regularly and, because I do, I am aware of the opportunities to spend money.  Just to be clear, I classify an impulse item as an item that I may have been looking for for a while, but which suddenly becomes available at a desired price.  As an example, I needed a couch.  I looked for one for 4 years, but couldn’t find the right price and quality.  I walked into a local furniture store about a year ago that was having a closeout sale.  The sofa that I wanted was 50% off.  I performed the internal calculations and bought the sofa.  A similar thing happened this year with a chair.  I had been looking for a specific chair for over 5 years.  Found a floor model for 30% off and got an additional 5% off just for asking.  In this case I had been planning to buy the iPad, but the initial Wi-Fi issues with the iPad knocked it down on my list of spending priorities.  I bought the chair and not the iPad.  One other method to my madness is that I don’t shop.  I hate shopping and I can always find something to buy so my spending is ultimately based on things that I need or things that I want and have thought a long time about buying.  Ultimately, though, I don’t care when I get the things that I need or want.

What are your methods for setting spending priorities?

Please comment.

Two days ago, I got this message sent to me from a friend:The New York Post – iPhone – Page Six – Suze Orman feuding with financial guru

The other financial guru was Robert Kiyosaki. I went to Twitter to find their exchange.
What I found was more of a pebble in a puddle than a Tsunami. Here it is:

From Robert Kiyosaki

I can’t believe this lady – @suzeormanshow. No way in hell she believes what she
teaches. 10:25 AM Mar 1st via HootSuite

Suze Orman’s reply

AT LEAST @theRealKiyosaki I DID NOT LEAD MILLIONS OF PEOPLE DOWN THE PATH TO LOSE ALL THEIR MONEY IN REAL ESTATE AS YOU DID. SHAME ON YOU
1:06 PM Mar 1st via web

Robert Kiyosaki’s Reply

If we are talking losses @suzeormanshow how about the TRILLIONS lost through
401K’s http://ow.ly/1cZW4 4:51 PM Mar 1st via web

That was It. I checked Twitter 24 hours later to see if there had been an update, there
hadn’t been. The night of the smackdown, I Googled Robert Kiyosaki versus Suze
Orman and got very few seach results. Different story today. Huffingtonpost, ABC
news, Your Money Mogul all had basically nothing to say but repeat the exchange and
ask people what they thought. I have read both financial authors and have benefitted
from the advice of both, but I understand Kiyosaki’s limitations as well as Suze Orman’s
whose advice would I follow?  RKs hands down. With this latest financial downturn, I
came to the stark realization that if I only followed Suze Orman’s advice, my net worth
would be half of what it is. Because I also followed RKs advice, it is what it is.

What did I learn from Suze Orman?

To value people more than money. That was the central message of Nine Steps to
Financial Freedom. I also learned how stock brokers work and as a result I am
extremely distrustful of advice meted out by brokers as the path to wealth. I tried to
share the information about stock brokers I gleaned from Orman’s writings with my
mother. Convinced that her broker was her friend she ignored my pleas to liquidate her
holdings and move to a different brokerage house. She stayed with her broker ,
bought KMart right before it went into receivership, was told NOT to buy index funds by
the same broker and missed out on an opportunity to invest in Vanguard Health
Care before it was closed to new investors (the broker wouldn’t return her calls when
she wanted to liquidate some of her positions to make the investment). When she
finally realized she needed to move her money, she had been in under-performing funds
for several years and the funds had both back and front end loads. That broker clearly did not value people more than money.  Quite the opposite.  She had my mother coming and going.  Suze Orman explained that brokers are simply sales people hired by brokerage houses more for their moxy than any understanding they may have of the markets.  Lacking financial literacy, they rely on the brokerage houses sell side analysts to make buy recommendations to their clients.  A brokerage house may take up a large position in a stock and need to unload it on their clients.  To me this is akin to being told in a department store that I look great in brown and should buy something in brown simply because brown is the major color the store has.  It was this information that drove me to read all things financial and in many ways I have Suze Orman to thank for it.  But I also realized that once I took care of the basics, Orman has little to offer one truly seeking wealth.  She can tell me 6 ways from Sunday how to get out of debt, how much I should save for emergencies, what kind of insurance I should buy but she really cannot tell me how to get wealthy. The stock market is really too unreliable, in The Stock Market Scam I reviewed the true long term returns of the market. In my upcoming post, What did Warren Buffet Really Say? I argue that unlike most people who put money into stocks, Mr Buffett is not looking to retire on that money at age 65.  The need to live on the money in a Roth or 401K in retirement introduces all kinds of risk to a retiree that Suze Orman never addresses. For example, what if you need the money in a down market and are forced to withdraw principal?

What did I learn from Robert Kiyosaki?

I was given a copy of Rich Dad Poor Dad in 1998 before I had ever heard of Suze Orman.  I devoured the book in a weekend.  RDPD stresses financial literacy, frugality, and points out a novel concept, that your home is not an asset.   Many people today have finally gotten that message although not soon enough to prevent the loss of a trillion dollars in net worth in this latest housing bust.  As a result of what Kiyosaki teaches, I live in a modest home and I have positive cashflow investment real-estate.  Kiyosaki also teaches that for people to become wealthy they have to broaden their skill sets and advocates network marketing as a way to learn the skills of communication and selling: two skills at which both Kiyosaki and Orman excel.  Because of Kiyosaki, I know why I own the assets that I own.  Yes, Suze, I own whole life as well as term insurance.  Sometimes I feel that Suze Orman is so dogmatic that her entire philosophy can be expressed as follows:  1) Get out of debt 2) Never buy whole life insurance 3) Buy Term Insurance and invest the difference between the Term and Whole live premiums in the stock market. While Kiyosaki’s philosophy is that we must become financially literate.

What are your thoughts?  Please comment.

Robert Kiyosaki’s Key Financial Philosophies