Monday, May 25, 2009

What are My Priorities?

When it comes to budgeting, paying your bills and paying off bad debts, it is important to realize what your priorities should be. This will vary from person to person slightly, but there is a definite order to what bills you should pay no matter what. After that the order may shift depending on your priorities and your situation.

Priority One: Cover Your Necessities
Your first priority should be shelter, food and electricity/heat. These are the basics that an individual needs to live. Within these categories it is possible to overspend. Your housing should not be more than twenty five percent of your salary. If it is then you may need to sell your house and buy a new one, or you may need to increase your income. You can decide which way you want to deal with the situation. Similarly you should do all you can to keep your grocery bill at a reasonable level. Reasonable may have different limits if you are deeply in debt and behind on your bills as compared to being debt free. Do not starve, but you can work to lower your grocery bill. Also you should try to lower utility costs as much as possible.

Priority Two: Get Out of Debt and Save Money
After you have met your basic needs your next priority should be saving money or getting out of debt. It does not make a lot of sense to put a lot of money into savings if you are paying more in interest on your debts. You should be at least making minimum payments on all your debts before you spend money on other items in your budget. You should strive to put between $200.00 to $500.00 extra towards your debt each month if at all possible. If you are debt free, you should be saving at least ten percent of your income each month. You should also try to increase your retirement savings to fifteen percent of your income.

Priority Three: Spend Your Money Your Way
Deciding on the remaining priorities in your budget after this is completely up to you. You may decide that the gym membership is more important than saving for a big screen television or that shopping for clothes is more fun than going out to the movies. The key to the rest of your spending is to not overspend. You can divide your eating out, clothing and entertainment categories is a variety of ways that suit you and your personality. This may change over time as your priorities change throughout your life.

Top Priority: Retirement
Retirement savings should not be last, in your priorities. You should contribute up to your employer’s match until you are debt free. If you do not have an employer’s match contribute about five percent of your income each month to retirement. It will not greatly lower your take home pay, and you should not stop contributing. Once you are debt free, then you should work on raising your contributions to fifteen percent on your income. This can include any employer’s match that you receive. Then you should base your budget around the new take home amount that you have.

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