In a world where many people prioritize looking comfortable for being comfortable, financial independence may be a herculean task. Individuals and companies need to learn the art of setting financial priorities and a budget they can keep. This is key to financial freedom and progress.
An individual that does not master the ability to set financial priorities and a budget that he/she can keep will struggle. The same applies to businesses/companies. And in both cases, bankruptcy is likely to occur.
It is important that you understand the importance of setting financial priorities and a budget you can keep especially as resources are always limited. Unlike needs and wants that are quite numerous.
Setting Financial Priorities
Setting financial priorities otherwise called the scale of preference is an integral aspect of attaining economic independence. It is the act of prioritizing needs from wants. While priorities are given to needs over wants, special attention is paid to more pressing needs over others.
It illuminates the relationship between scarce resources, unlimited wants, choice and opportunity to derive human satisfaction.
Take the example of an individual that needs to spend money on food, shelter, and clothing as well as plan for a summer vacation. He/She probably needs the vacation to unwind. But at the moment, the food, shelter, and clothing are more paramount to His/Her survival than the vacation. Especially if the resources available with such an individual cannot cover all expenses. That is what a scale of preference does.
Similarly, a business/company would prioritize staff salaries and other expenses that affect the day-to-day running of the organization over others like changing the Manager’s car for example. This preference is setting financial priorities in action.
It is paying attention to expenses that are considered as unavoidable against those that can be attended to later when there are excess resources. It is deciding between two or more possible expenses, which to go for immediately when you are unable to afford all at the moment.
Setting a Budget you can keep
While it is important to set a budget, it is more important to set a budget you can keep. “Cut your coat according to your cloth” is a popular phrase, and it emphasizes the importance of setting a budget you can keep.
It is equally important to note that the phrase above encourages you to cut your coat according to your cloth and not taste. This is because, sometimes, your taste may be too expensive for you.
Defining Budgeting, myMoneyCoach calls it “the process of creating a plan to spend your money”.
With budgeting, hope is not a strategy. So, your plans must align with your earnings, and not on a promised fund. It is not wishful thinking. Therefore, you must set your budget to work with what you have at hand or expected earnings.
A proper budget also allows you to compare your earnings vis-à-vis income, understand if you can afford those expenses and strategize on getting the same.
How to set Financial Priorities
While it is great to tell you how important it is to set financial priorities, it is equally important to guide you on how to do that effectively. The following are proven tips to help you set your financial priorities;
Make your money work for you.
No matter how hard-working you are, there is a limit to how far/much you can work. You get tired, fatigue sets in, you eventually retire. But one of the easiest ways to prioritize your finance and achieve economic freedom is to ‘employ’ your money.
Even after you have long retired from actively working, your money keeps you going as you enjoy continuous ROI.
Irrespective of how great and sufficient your job is, it is always advisable to invest your money in ventures that are proven to earn you passive income.
Have Short, Mid, and Long-term Financial goals.
You may also want to consider categorizing your financial goals into short, mid and long-terms. This gives you a sense of direction and helps confirm if you are on track or not.
The Short-term could be between some months to a couple of years (say 5). Mid-term could be 5-10 years, and long-term, 10 years till retirement.
As you set your goals, make sure that they are achievable goals. Also, have them written down in a place that you can easily access. Not forgetting to self-evaluate objectively, at intervals. Having an accountability partner may also help.
Work with a budget.
You cannot talk about setting financial priorities and attaining economic independence without talking about budgeting. They are branches of the same vine.
As your active and passive incomes begin to grow, you may be tempted to become a spendthrift subconsciously. This is where budgeting comes to the rescue.
However, this does not mean that you will not be able to spoil yourself with luxurious things when necessary, but it sure guides you from wasteful expenses.
Live a debt-free life.
If you want to get your finance right, you will have to do everything necessary to stay away from debts.
When you have a lingering student loan or say you’ve taken some loan to boost your business, for example, do well to clear them as soon as possible. These targets may affect your goal of financial freedom.
If you cannot afford a luxurious car or apartment at the moment, for example, you may want to consider a less expensive alternative.
Prepare for emergencies.
Even though they don’t happen often, emergencies can be tricky and frustrating when they do. It is, therefore, a piece of valid financial advice to have some funds stashed up for emergencies.
It may be an unforeseen health-related issue, car/fire accident, or even a natural disaster. You cannot go wrong with preparing for emergencies.
This tip also prevents you from touching the funds meant for other purposes which may translate to financial retrogression.
How to set a budget that you can keep
Budgeting is important to help you control your spending as well as help you achieve your financial goals.
It is a written financial planning tool that summarises and compares your income and expenses within a given period. Individuals need budgeting, the same way companies and governments do.
It is not enough to have a budget. It should be one that you can keep and work by. The following tips, therefore, will guide you to have a working budget;
Calculate your income.
The first step to a working budget is to identify your net income. Irrespective of how many sources of income you have, you need to calculate all that is left with you after all necessary deductions (tax, insurance etc).
Remember, the execution of the expenses in your budget depends on your income as you cannot give what you don’t have.
Have a list of recurring expenses.
Effective budgeting also entails that you identify those expenses that happen repeatedly or periodically- usually monthly.
Some of such are but are not limited to mortgage/rent payment, groceries, utilities, transportation costs, loans repayment, entertainment and savings amongst others.
This helps you to identify your spending patterns and you can adequately prepare for them in the order of their importance.
Objectively categorize your expenses.
Objectivity is paramount in budgeting. You need to put your emotions aside if you intend to budget effectively.
This, therefore, is the point where you access your expenses and categorize them adequately. When you objectively categorize them, it becomes easier for you to identify the areas where you need to adjust and how to go about it.
Categorizing your expenses also helps you to identify what percentage of your income is expended on what.
Adjust where necessary.
The idea behind budgeting is to cut down on all excesses as possible. After objectively evaluating your spending behavior, you may need to make the necessary adjustments.
This entails that you sacrifice and do away with some aspects of your spending character. You may have to do away with some expenses- especially those you categorize as frivolities. Those that are wants, and not needs.
Doing this will also avail you of extra cash after settling important bills. You may then decide to put the extra money into an investment or add to your savings as the case may be.
Always review your budget.
That you have a budget is not enough. It is subject to review. Factors like economic policies, change in earnings, increased unavoidable expenses (like the birth of a baby for example) and other factors may affect your budget.
As a result, you may want to review your budget to suit your current economic reality. You may decide to do that monthly, quarterly, twice a year etc. The idea is to ensure that you are not working with an obsolete budget. This is because a non-working budget is as good as a no-budget at all.
Money habits like Setting Financial Priorities and a Budget You Can Keep are important in your quest for economic independence. The global economic realities are unfriendly, and intentional actions backed with adequate financial literacy are the way out to keep your head above the waters.
The ability to set Financial Priorities and a Budget has become a superpower that is important to not just individuals and organizations alone. Governments across the globe are not left out of leveraging these skills to effectively run their economies.