Some Expenses Are More Important than Others by Nature, Some by Choice
During the housing downturn, financial experts were amazed to hear of consumers who worried more about making their credit card payments as agreed than they did about making their mortgage payment on time. It made no financial sense to prioritize an unsecured debt (credit card) over a secured debt (mortgage).
To prioritize your purchases, start with needs and secured debts and move to wants and unsecured debts. Following is one possible result of prioritizing your household expenses:
Generosity first (even if it is time and support rather than money)
Mortgage/Rent (payment, insurance, utilities)
Groceries (not dining out)
Required prescriptions and medical procedures
Transportation (payment, gasoline, insurance)
Unsecured debts (credit card, medical, store, etc.)
Phone / Internet
Gift giving (holidays and birthdays)
Cable/Satellite TV/Entertainment subscriptions
Entertainment (movies, plays, concerts)
Club and gym memberships
Vacation and travel
Addictions, habits and vices (smoking, alcohol, coffee, chocolate, vaping
Obviously, there are plenty of expenses not listed here, but this provides a good start. Your own list will (and probably should) differ in several aspects, given the unique financial situation of your own household.
One of the main financial challenges households have when living paycheck to paycheck is differentiating between needs and wants. It may sound simple, but without actually writing down your survival needs and prioritizing your wants, channeling your money to what is most important to you becomes a murky proposition. If you wait until you are surfing Amazon to decide what you want and what you need, you will inevitably allow the marketing and advertising gurus much more influence over your choices than you should.
Prioritizing your expenses is about examining potential consequences and outcomes, then deciding which you prefer and which you hope to avoid. Living on the street, for example, may not lead to immediate death, but the life expectancy of those who do live on the street is much lower than the general population. Going without food, on the other hand, will have some immediate and unpleasant consequences.
You should start by considering your physical survival needs and the needs of those for whom you are responsible (spouse, children, aging parents, protected individuals, etc.). These typically include food and water, shelter, security, and protective clothing. Add to these the two unexpected needs of generosity and saving to round out the needs.
Why generosity? Whether you are able to share money, donate clothing, or give of your time, energies and support to nonprofits and charitable agencies, giving keeps the rest of your expenses in perspective. If you volunteer for an organization fighting homelessness, you will have much less trouble prioritizing your own shelter and security expenses. If you give to an agency providing food for the hungry, you will more easily differentiate between eating at home (groceries) and dining out (a luxury).
Savings also keeps priorities in focus. Committing to saving a portion of your income every month means that you recognize that emergencies are likely to happen in the future, and when they do happen, you will be better prepared to survive.
After prioritizing all survival needs, move next to expenses termed, pseudo-needs. These include transportation (car or truck, public transportation, gasoline, insurance), communication services (phone and Internet) and, in some cases, even childcare. These expenses feel necessary for survival “in the modern world,” but they may not be. Without them, life would be extremely inconvenient, more difficult and likely different from how you know it now, but still possible.
After prioritizing your survival and pseudo-needs, move finally to your wants. Begin comparing your wants with a question such as, “If I had to do without one of them, would I rather do without going out to a movie twice a month or going out to dinner twice a month?” Move whichever expenses you prefer to do without down the list to compare to the next expense.
Treat debt payments a bit differently from your needs and wants and even from other debts. Secured debts typically include home mortgages, home equity lines of credit, cars, trucks and RVs. A secured debt means that if you do not pay the debt as agreed, the lender has the right to repossess the vehicle or foreclose on the property.
Prioritize your secured debts above your unsecured debts. Prioritize them above your wants and possibly some pseudo-needs based upon the potential consequences if you did not make the payments.
When prioritizing your unsecured debts, you might be tempted to place them below many of your wants. Keep in mind that most unsecured debts involve interest charges, and that every dollar you pay in interest is a dollar you cannot use for wants now and more than a dollar you cannot use for wants in the future.
This explains why most households should prioritize credit card and store card payments between their pseudo-needs and their wants. Pay off your unsecured debts and you will have more cash available to spend on your wants.
Your priorities list will likely differ from the one at the top of this post, but if you have your mortgage or rent below your credit card payment, it is time to rethink your priorities