Priority spending
I don't have all the statistics as to the savings rate of our country at current time, nor do I feel it matters. I know it's in the low single digits, but these statistics mean nothing to me personally, nor should they you. All that really matters is your current rate of savings, and whether or not it's adequate enough for you to obtain financial freedom.
The Theory of Priority Spending is simple and pure common sense. In order to obtain financial freedom you need to accumulate enough savings in order to generate enough passive income to cover your living expenses. So since savings is the key element in obtaining financial freedom this item should be the first priority in the budget process.
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The mistake I see with most personal budgets; is they start with income, subtract expenses in no necessary order, and whatevers left is savings (or worst yet money to blow). This is a major flaw in the budget process and a big reason why we're saving so little as a country, leaving people unable to retire comfortably or have money set aside for an unexpected occurrence. Actually, an even bigger flaw is probably the fact that most people don't budget at all and have no idea how or where their money is going. Since my target audience is responsible individuals, well just have to ignore these folks for now, unfortunately.
Now back to priority spending. I already established that savings should be our first budget item, but how much is enough? This is where I'm probably not going to make too many friends. I read and hear a lot finance folks suggesting that 5 10% of your income is enough, and while that may be a bit better than our national average, it's nowhere close to sufficient.
Just think of an individual making $100,000 per year. Even if they save on the high end of 10% or $10,000, we all know how quickly that can be swept away. A minor home repair or an unexpected illness can easily exhaust that. So what I suggest is somewhere around 50% of your gross yearly pay. Aggressive? Yes. Impossible? No! I know because I've been doing it for years.
See, if saving becomes your number one priority, then the importance of your remaining priorities become less important and in turn less extravagant.
Now after you've determined your savings goal, your remaining budget should be in order of priority. I use the word priority to help people think of what really matters most; such as shelter, food and transportation. These items are basic necessities and must be considered before any discretionary spending.
How much you spend in your remaining categories I'll leave up to you. I hate to suggest percentages and/or rules of thumb seeing as how responsible individuals should be given the choice to allocate their resources as they see fit. All you really need to know at this point is you have the remaining 50% or so of your net income to allocate. I will only suggest you allocate in a certain order based on fulfilling your basic needs first before moving on to other categories.
If when you're complete you find yourself in the red, then let me start by saying your priorities are out of whack! Time to sharpen the pencil and begin to re-prioritize your life, get it? Will it be fun? Probably not. Will it take sacrifice? Most definitely. Will it be worth it in the end? Heck yeah! Because living within your means and responsibly is much more rewarding than a bigger house, nicer car, vacations, and accumulation of unnecessary stuff.
To give you a visual of a properly prioritized budget, here is a sample of my current budget template and some percentages for added color:
After savings I consider shelter my next highest priority, but I'm sure one can make a strong argument for food, and I wouldn't debate that one. Feel free to choose between the two, I'm really not one for splitting hairs, plus I just happened to choose shelter seeing as how I know where we live is more important to my wife then what or how much we eat.
I really just want you to think of the order from a practical standpoint in that it's more important to fulfill your primary needs before other discretionary spending. Plus, if you're not attaining your savings goal then it's best to start from the bottom when looking for areas to cut back.
Conclusion
Yes, life if more than just accumulating wealth. But when you look at your life and the stuff you've accumulated over the years, is it really worth the price? For me savings can buy much more than stuff, it buys me freedom, which is exactly what I want for you. Also, it's just simply the responsible thing to do. Imagine never needing a handout from anyone, or worse yet, imagine needing to ask someone for a handout, how demoralizing. If you find yourself in the vicious cycle of living paycheck to paycheck then it's time to re-prioritize your life so that savings is your most important expenditure. If it's true wealth you desire then you need to save aggressively in order reinvest your savings. Its this accumulation that will afford you the ultimate freedom.
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Posted in Home Improvement Post Date 06/22/2020