This article likely won’t be the most popular one among the bunch, but at the very least it’s timely given all the financial chaos going on worldwide (un- or under-employment, currency inflation, rising consumer and government debt, etc.). In the interest of full disclosure: ten years ago, I would’ve read this article and immediately dismissed it because in my mind, ALL spending was important. The overpriced satellite TV subscription was equally as important as paying the mortgage; the frequent and excessive spending on hobbies was just as important as paying the electricity bill or maintaining adequate insurance coverage. But the fact is that type of thinking is simply not true—a hierarchy inherently exists within your spending, and it’s up to you to figure out what that looks like. Certain items are needs, some are wants, and others live in between those two categories. As financially savvy individuals with goals to meet, it’s our responsibility to understand and prioritize those items accordingly so we have a clearer picture of our overall financial health.
By now you may already be rolling your eyes, but hear me out! Here are a few of the benefits to prioritizing or ranking your spending:
- Clearer and better-defined list of needs, wants, and in-betweens (read priorities)
- Understanding of how much is spent on each category
- Knowledge of which expenses could be reduced or even eliminated, if needed
Now, how do you go about ranking these? First, you need a complete list of spending by major category. If you’re unsure how to do this, please see my article on Financial Monitoring and Analysis here to get you started: https://sowadime.com/2020/07/29/example-post-2/.
Once you have a list by category, including spending, start to consider which of these items are absolutely, unquestionably essential. My wife and I call these mission critical expenses—there is no way we could quickly or easily eliminate or reduce in a substantial way. Maybe the list looks like this:
- Mortgage or rent
- Fuel for a vehicle or money for public transportation
Then, consider which items are exclusively “wants” or luxuries and could be eliminated entirely if your financial situation became dire (i.e. job loss, health/medical complications, disability, death in the family, etc.). REALLY challenge yourself here! It helps to imagine what your financial landscape might look like without a job, for instance. By default, most folks would prioritize life’s necessities (otherwise known as food, water, and shelter). If you’re having difficulty visualizing spending without a job, another way of thinking about it is: what expenses would you forego to keep a roof over your head or eat a hot meal? In our house, we call these non-critical expenses—ones that wouldn’t necessarily be psychologically easy to give up, but if it was between spending in those categories and feeding our children, we would eliminate the frills every time. That list might look like this:
- Satellite or cable TV
- Streaming media (Netflix, Hulu, Spotify, etc.)
- Upgrade to newest cell phone every 12 to 24 months
- Dining out
- Entertainment or hobbies
- Clothing and shoes
By default, the rest of your categories would fall in between a need and a want. These would be known as semi-critical expenses and could be reduced, or possibly even eliminated, if things got bad enough financially.
Keep in mind this exercise is not one size fits all. Each household’s prioritized list will look a little different, depending on the categories and how important they are relative to each other. Maybe one household decides the cell phone plan is mission critical and cannot, under any circumstances, be eliminated or even reduced by financing cheaper phones or using less data. GREAT! Perhaps another household would qualify this one as a semi-critical expense because they could (perhaps begrudgingly) reduce data consumption by using Wi-Fi or go to cheaper phones in the event of a crisis. FANTASTIC! A third household might decide a cell phone plan is completely unnecessary and could be eliminated entirely. SUPER! The point of the exercise is to determine what IS a priority and what IS NOT a priority for your specific set of circumstances and be able to adjust spending accordingly.
Another piece of advice: do not be hesitant to redo this analysis periodically. As your life changes, your spending priorities will almost certainly change as well. Our spending priorities look starkly different now than it did before we had kids, so it’s important to recognize changing priorities as your life changes.
This line of thinking has benefitted our family immensely over the years. It may not be a pleasant discussion (usually a series of discussions), but it’s a necessary one so you’re better prepared for the future. We’ve cut out satellite TV at $140/month (going on 4 years now—don’t regret it one bit!), curbed excessive spending on clothing and hobbies; we’ve haggled down on some of our recurring bills through requesting periodic discounts on service, reduced our cell phone bill, pared back on grocery spending, and more. This exercise is very powerful and can change your financial future!
P.S. – A hidden benefit of assessing your spending this way is it will help you determine how much you should stash away in an emergency fund! We maintain 6 months’ worth of mission critical and semi-critical expenses in an interest-bearing savings account in case things ever get ugly for us financially. Read more about emergency savings and strategies in an article coming soon!