No matter what your financial goals may be, it’s important to understand how to prioritize your spending, especially if you are carrying credit card debt. Keeping track of your money is the key to knowing whether you will be able to balance all your financial priorities, like paying off debt, saving for retirement, or even begin building wealth.
Financial Priorities #1: Budget & Cost of Living
When assessing financial priorities, the top of the list is the same for everybody–the budget & monthly living expenses. The 4 types of monthly expenses in order of importance are:
- Fixed Expenses – These expenses must be paid every month, and the amount does not change from one month to another. These may include your mortgage/rent, car payments, or child support expenses. Credit card debt or debt management plan payments also fall into this category.
- Variable Expenses – This type of expense is also required each month, but the amount can fluctuate depending on circumstances. Some examples of variable expenses include food, gas, or utilities.
- Periodic Expenses – These expenses do not occur regularly, but they need to be paid when they arise. Medical bills, car repairs, or school supplies are a few examples of periodic expenses.
- Discretionary Expenses – These are the nonessential expenses that can occur on a regular or periodic basis. Some examples of discretionary expenses are cable TV, gym memberships, or charitable donations.
It’s essential to balance your budget every month. If you are not making enough to cover your fixed, variable and periodic expenses, the first place to cut back is within your discretionary expenses.
Financial Priorities #2: Emergency Fund
Even if you’ve balanced your budget and are carefully monitoring your spending, unforeseen events can come along and spoil all of your hard work. An emergency fund can help you protect yourself from credit card debt when life throws you a curve ball.
Putting money into an emergency fund should be a high priority once you’ve covered your monthly expenses. Having cash designated for emergencies is one of the best ways to ensure avoiding a financial disaster. The funds can be kept in a savings account so that you earn interest by not touching the money unless it’s absolutely necessary.
Financial Priorities #3: Eliminate Debt
Working to eliminate debt is as important as starting an emergency fund. Credit card debt specifically should be paid off as soon as possible, and you should try your best to keep a zero balance to avoid paying any additional interest or fees.
Student loan debt is not as high a priority since the interest rates are generally lower, but it is still debt that costs you more the longer you take to pay it off. However, this analysis by HelloWallet suggests that it might not be best to prioritize student loan payments over saving for retirement.
Financial Priorities #4: Retirement Savings
Saving for retirement is a financial priority that is often neglected because it means having less money to work with right now which is what most of us focus on instead. If you’re able to put money aside without worrying that you might need it for emergencies or paying off debt, then consider putting as much as possible into an employer-matched 401(k) or IRA. Not only do these accounts increase savings over time, but they also help you pay less in taxes now.
Financial Priorities #5: Building Wealth
Once you’ve managed to eliminate debt and handle all of your other financial priorities, you can consider putting money aside that can be used to build wealth. Making investments or putting a down payment on a house are ways to build wealth that are more feasible at this stage.
Building wealth is a goal we all strive for, but it starts with sticking to your budget and knowing how to balance your financial priorities.
To speak to a certified credit counselor today about managing your finances, call American Consumer Credit Counseling at 800-769-3571.