Categories: General
      Date: Jul  7, 2011
     Title: Budgeting Fundamental #1—Prioritizing Needs and Wants

The foundation of financial success is pretty darn simple. You spend less than you earn, and then put the surplus aside for longer term goals and priorities. Having a spending plan, or budget, is just an on-going discipline that successful people employ to make this happen.

In this article the first of four fundamental elements of the budgeting process--prioritizing your needs and wants--will be covered. The remaining fundamentals will be covered in later posts.

Prioritizing your needs and wants

"It's not how much money you make that matters, but how you make do with what you have." - Big Mama (Michelle Singletary's grandmother)

"Plan for the future, because that's where you are going to spend the rest of your life." - Mark Twain

The first fundamental element of a successful spending plan is the prioritiziation of the many competing interests for your paycheck. Instead of just trying to figure out where you currently spend your money (although this is a good exercise), you need to decide where you should spend your money. There is no substitute for this critical exercise in family strategic planning. If you are single, this may be a lonely exercise, but it is generally much simpler. If you are married, this must be a team endeavor--usually involving a generous amount of negotiation and compromise.

Key considerations and behaviors:

• Setting goals: Creating your spending plan starts with setting goals. What do you want to accomplish with your life and money? Where do you want to be in a year, three years, five years, or twenty years? Listing, discussing, and agreeing upon goals is critical before you start making the important decisions on where you will spend your limited resources.
• Making trade-offs: Creating a spending plan is about prioritizing your needs and wants. It is about agreeing on what you will spend money on, and (maybe more importantly) what you will not spend money on. There is no getting around the fact this can be very difficult, especially if your resources are considerably less than your perceived requirements. As hard as this may be, you will be happier making a well considered spending decision up front, then an undisciplined one on-the-fly. It often takes a purposeful decision to sacrifice today, in order to win tomorrow.
• Agreeing on a core set of values: Spend some time discussing and agreeing on a core set of values for how you are going to manage and spend your money. This may come easy for some, but can be a real stretch for others. However, an agreement on these core values will guide you in the trade-offs you will inevitably have to make. Some the areas you may consider here are:
  • Debt--When is when it is acceptable to use debt? How high of a priority it is to get out of debt?
  • Financial security--How important is it for you to have financial margin in your life? For example, having a well funded emergency savings account, or plenty of "buffer" in your monthly budget for unforeseen expenses.
  • Giving--Will you give to the church or other charities on a regular basis? How will these commitments be prioritized relative to spending and saving?
  • Fun--How much importance will you place on fun experiences today relative to making progress on financial goals that are in the future? (Yes, you can budget in some fun!)
  • Work/life balance--The trade-off between career demands (and more money) and family time and less stress.
• Anticipating the future: Planning is a about preparing for the future. In creating your budget, you need to spend adequate time anticipating your future needs and wants. Some of these requirements are pretty easy to predict--e.g. the big auto insurance bill that comes every February and August. Others require you to consider what likely lies around the bend in the road--e.g. new tires, a repair bill, or even new shoes for your children. Of course, even further down the road may be a down payment for a house, college expenses, and eventually retirement. You don't exactly know when, but you know these things are out there. You may not be in a position to save for all of them today, but you want to keep them on the radar.
• Teamwork and communication: If you are single, prioritizing your spending may be difficult, but it is a fairly straight forward exercise--you make all the decisions. For couples, this is a major test of your commitment, teamwork, and communication skills. One member of the team cannot "opt out" and leave the responsibility to the other. Both must show up ready to work and compromise. Prioritizing your scarce resources often means sacrificing your needs for the needs of your partner. Learning to work together effectively as a team, is not only powerful in meeting your goals, but can really build your relationship.

Tools and links:

• Personal Budgeting: How to Set Financial Goals
• Setting Your Financial Goals with a Goals Worksheet
• Values and Personal Finance: Letting Values Determine Goals

The next in this series will cover the second fundamental element of budgeting--creating and documenting the plan.