One of the most important aspects of setting a budget is deciding who gets what first. Naturally, certain obligations should always be given first dibs on whatever cash you have coming in, it’s just common sense. You’re going to pay for your home before you spend for a vacation, right? Right?
However, as you drill down, if things are tight, you’ll have to make some tough decisions in other areas. In other words, there will be times when prioritizing your expenses will be key to achieving your financial goals
First Things First
Everybody needs food, shelter, clean water and clothes. Transportation and its attendant costs rank highly as well. Further, if you have a home and a car, you must insure them.
Saving for retirement is paramount as well. After all, if you had to bet, would you wager you’re going to die before your money runs out? Either way, that’s a losing proposition. You should also make it a point to create an emergency fund of at least eight months of living expenses.
Taking advantage of a free budget planner like the one offered by Clarity Money will help you get this set up. Once those factors are covered, you can start looking at your other expenditures.
1. Eliminate Credit Card Debts
In most cases, paying off credit card debt gives you a better return on investment than any other use of your money. Think about it, most credit card agreements stipulate interest rates between 14 and 20 percent
This means you’re going to be paying between 14 and 20 percent on your outstanding balances. Regardless of how well you’re invested, you’re seldom going to see returns in that range. Therefore, you’re better off eradicating credit card debt as soon as possible than you are putting your cash toward any other purpose — once the basics are met.
2. Set Aside Cash for Repairs and the Like
Cars break down, roofs leak and appliances go kaput. While it’s tempting to lump these issues under the heading of “emergencies”, you know these things are going to happen sooner or later. Sure, they tend to come on when you least expect them, but they are inevitable nonetheless.
Acknowledging this reality and taking the appropriate steps to be ready for it puts you in a proactive position, rather than a reactive one. This is why it’s important to create a fund from which you can draw to deal with them when they come up. Otherwise, you’ll go into debt to do so — which will ultimately be even more expensive.
3. Rank Your Additional Goals
Looking to get a new car in a few years? Would you like to save a down payment to buy a house soon? Want to take a nice vacation? Craving a remodeled kitchen? What does your heart desire?
Make a list of these things and estimate the timeframe within which you’d like to accomplish each one. Once you have it in hand, research the costs involved and divide the price by the amount of time you want to give it to happen. This will tell you how much you need to save each month to meet the goal(s).
Having that information in front of you makes it easier to decide just how important each one really is to you. Prioritizing your expenses this way will also help you keep to your household budget, while feeling good about getting closer and closer to your goals.
It’s a more than worthwhile endeavor.