Understanding Spending Priorities

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.