To make the most out of your money it is necessary to set economic priorities and recognize the different responsibilities you have on your everyday life. To accomplish this, you have to take into account many aspects that will allow you set an importance level on each one of them. If you do this right, you might be able to save good money. When you face a lower income than you expected, or any increase in your common expenses, you must prioritize in order to maintain stability. Here are three steps:
1) Calculate Your Incomes
The first and most important step when prioritizing your expenses is to calculate your incomes, your salary (after deductions and taxes), pensions, donations, interest rates, social security, among others. Every cash inflow that a family perceives for a period of time, may this be daily, weekly, biweekly or monthly, is considered as an income.
2) Identify Your Expenses
Once you established what your fixed income is, you need to determine the most important or basic expenses. You could easily identify them because they’re generally bills that take on a monthly basis more or less the same amount: electricity, rent, mortgage and food. Basic expenses are essential because they cover your well-being and basic needs as well as your family’s.
“When you face a lower income than you expected, or any increase in your common expenses, you must prioritize in order to maintain stability”
You also need to determine your variable expenses, named like that because of the frequency in which they appear. There is no time pattern and in some special cases, they are dispensable —if the economic situation calls for it—. Clothing, personal care, health care, insurance payments and taxes fall in in this category. The last one is an easy one to forget, given the fact that in most cases they require payment on an annual basis, so you should save a percentage of your monthly income to be prepared when this time of the year comes.
There are also other types of variable expenses that are truly dispensable, these are expenses related to hobbies and entertainment, such as theater, cinema, trips, vacations, dining out and other activities that you could postpone or stop carrying out and without giving up on your comfortable and fulfilling lifestyle.
Examples made above are only for guidance purpose to get you starting into to prioritizing your expenses. However, this varies between families, as it is something personal that should be defined with a little bit more of dedication.
3) Make a Payment Plan or Budget
Once you know what your earning and spending your money, it is important to create a payment plan or a budget that allows you to make the most out of it. With this budget, you can set spending actions that adjust and go along to your incomes. Once you have already compared your income and outcome flow and frequency, the next important step is to define the cycle of your payment plan —either daily, weekly, biweekly monthly or yearly, and set your actual income and expenses for that period of time.
The payment plan is quite easy to do; you just need to take a moment to design a functioning system according to your money flow. Please, be objective and practical when collecting the necessary data and after you collected this information, you’ll need to analyze your personal results.
Are your expenses higher than your incomes?
Prioritize. You must adjust your spending rate to your incomes. Analyze your spending habits and avoid any unnecessary expenses. You’ll have to consider what you can and cannot afford to avoid incurring in debt. For example, if much of your income is designated to cover basic needs such as rent payment, then you should consider moving to a smaller home to lower your payments.
Also, when it comes to electricity and other service bills, you may think it doesn’t make a difference on a short term, but you’ll feel relieved at the end of the year. You can also look for other solutions like increasing your incomes through part-time or temporary jobs; or checking if you qualify for help in public assistance programs for food.
Check up your assets and determine if you have anything that can be used to cover some other expenses. Vacations, eating in restaurants and shopping of household goods are less important. Look at your situation objectively and find solutions and alternatives that allow you to overcome you problems.
Are your Incomes Greater than your Expenses?
In this case, you won’t need to adjust your spending because you will have some extra money. It is highly recommended to save a percentage of it, so you can have a “safety net” in the future, block this amount and label it as emergency money.
Once you have created your plan and established the amount of money needed for every kind of expense, it is vital you respect it and stick to your own rules. Take notes and keep records, to make it easier for you. Your notes will allow you to make faster decisions in order to save and invest. After all, our main goal is to achieve a balanced budget.
Numerous changes can occur in your financial situation over time that will force you to rethink your budget: price fluctuation, changes in your family and habits. But as some depend on your actions, others may depend on external conditions, like a high inflation or a financial crisis, so it is convenient to save some money and periodically review your payment plan to make the necessary adjustments.
Remember, prioritizing your expenses is a fundamental task that will help you achieve your financial goals.