Great Savings Tip #90 – Prioritize Spending

8 steps to prioritize spending.

Today’s tip: Prioritize Spending

This post is #90 in our Great Savings Tip series, designed to help you find ways to spend less and save more. For more ideas see our Great Savings Tips page with a complete list of all our tips. Here are today’s tips you can put to work immediately:

What To Buy?

Well worn buck.

How do you decide what's important and what itsn't?

Tip #90) Prioritize Spending. You can read up all the “Great Savings Tips” in the world, but if you aren’t prioritizing what you buy, it’s easy to blow those savings on items you don’t really need.

Try This Instead

How do you prioritize spending?  Try this 8 step process:

(1)   Calculate your spendable cash inflow. Another way to say the same thing is look at your “after-tax” income.  If you earn wages of $1200 a month, but your take home pay (i.e. after-tax income) is $1000, then you want to use the $1000 figure.  Also, add any regular income you receive beyond your normal paycheck.  Maybe your parents give you $100 a month to help with some bills.  Maybe you earn tips.  Maybe you earn regular dividends on stocks you hold.  Or maybe you earn bank interest on savings.  Include bonuses only if you can count on them to reoccur.  Add it all up.

(2)   Calculate all your cash outflow. If you have this information readily available start with annual figures.  If you’re using Quicken, Mint or another method to track your bank balance this should be fairly easy.  However, if you have to figure this out from scratch use your check register (or bank statements) and trying going back for at least 3 months.  If you use bank statements it may be hard to tell what certain checks or debit transactions went toward.  Just do the best you can.

Break items down into a reasonable number of categories. 

Examples could include:


An apartment complex.

How important is it to own a home or rent an apartment?



Debt Reduction



Pet Care



Transportation (this could include auto, gas, bus, parking, car maintenance, etc.)

Entertainment (you might include your dining expenses here or in food, but be consistent)

It doesn’t matter how many categories you use here as you’ll refine your list later.  It’s more important the categories make sense for your particular lifestyle.  Also, make a master list so you can remember what goes into each category.  The category for Transportation above where we’ve included gas, bus fares, parking, etc. is an example how a master list can help remind us what went into the numbers later on.

(3)   Average your cash inflow and outflow figures. It’s easier to work with monthly amounts and since some expenses occur infrequently it’s a good idea to convert everything to annual numbers first and then divide by 12 to get a monthly average. (Note: if your only using 3 months worth of figures divide by 3).  Once you’ve calculate these averages, you add them up and compare them to your inflow and end up with a draft monthly spending budget.

(4)   Take a good look at your net monthly cash flow. On your draft budget, your net cash flow is the difference between what comes in and what goes out.  In the best case, there would be much more coming in than going out.  However, most people will find that cash outflow exceeds or barely keeps up with cash inflow.  That means it’s time to get serious and set some specific targets and priorities so you don’t break the budget.

Organize your spending priorities.

Write categories down and then cut up so each is on a separate strip. Now organize.

(5)   Refine your list of categories. Write a list of your current categories down on a piece of paper.  Now, cut up the paper so that each category is on its own separate strip.  Order the categories from the most important to the least important.

If food is your first choice place the strip for it at the top.  If you can always count on your family to offer a free meal when times are at their worst, it might be farther down on your list.  Keep moving the categories around until you feel they are in the proper order.

If some categories seem of equal importance you have three choices: 1) leave them as is, 2) combine them or 3) break them into smaller categories.  For example, you might think that all your utilities go right along with paying rent and so are about the same priority.  You could combine them together and call them “Housing”.  Or you might decide that Entertainment is too broad a category.  Maybe going out for a meal is much more important to you than buying a new video game or book.  In this case, separate the category in a way that makes sense—maybe as Entertainment In and Entertainment Out to describe whether it’s something you do inside or outside the home.

If you get stuck on an item ask yourself whether the items above or below are more or less important.  Keep at the process until your changes make sense to you and you have a clear idea of the overall order of priority.

A monthly spending plan.

My plan only leaves me $50 for entertainment so I can't afford that new guitar unless I tap savings.

(6)   Now, create a projected spending plan. This time use the new category list you developed in step 5.  To see what you can spend going forward, you may have to go back and look at some of your original numbers to see what a reasonable monthly spending average is for any new category you created.  Remember, the numbers you’ve gathered so far are in the past and are not necessarily going to be that accurate.  This is more likely to be true if you’re relying on figures gathered from your checkbook or bank statement for the past few months alone.

With the goal going forward of spending less, adjust each category up or down until you know you’ve covered the items that are most important to you first.  Then fill in the others. If your projected cash inflow isn’t sufficient to cover outflow, keep reducing the projected outflow in each category until you know there are no more savings to be had in that particular category.  For example, if your rent is $600, it’s not going to be less just because you want it to.  You’ll have to leave it at $600 and find the savings in another category.

If you end up with categories without assigned funds—that is if you had to use all your cash for higher priorities at least you know what kind of spending to avoid going forward.

(7)   Develop a sense of discipline. At this point you should have a rough idea of how much you can spend in each of your categories every month.  The key going forward is to develop a strong sense of urgency about sticking to your spending plan.  Chances are good you’ll come across some unplanned expenses in the first few months that throw you off course, so do you’re best to cut where you can and try to beef up savings.

You may have noted Savings were included as a category above.  Savings aren’t money you spend during the month, but in order to build them up or have money available when you’re paying an unexpected expense it’s good to think of them as an expense when you prepare a budget.

(8)   Refine your system. As you go forward refine your system until it works for you.  If you’re short every month no matter what you try, it’s time to think outside the box.  For example, maybe you could a few extra hours at work.  Maybe you get a roommate and cut the cost of rent by half.  Or maybe you’d be better off giving up the apartment and moving in with family or a friend.  Perhaps it’s time to get some debt counseling and consider discharging your debt through bankruptcy.  Maybe you have some things you can sell.  Keep at the process until you’re confident you can cover your monthly expenses without going into debt.

Make It Fun

To be sure, defining spending priorities can seem like a lot of work at first, so do whatever you can to make the process more fun.  Try making a game out of it.  Reward yourself whenever you achieve a goal.  Ask a friend for help. Gather a group of friends to discuss ideas for saving.  Whatever you do, don’t give up.  When it comes to spending, anything you can do to become more conscious of your choices will bring you closer to success.

Keep In Touch

Thanks for joining us for our Great Savings Tip series. If you missed any of our tips you can find them by clicking on the “Zero-Based Living” drop down menu at the top of this page. You can also register with our site and we’ll send you an automatic notice for all our new posts. Thanks for stopping by and have a great day!

By Bob Anderson
© 2011 Javabird LLC.  All rights reserved.


To see a list of all our Great Savings Tips click here.


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One Response to Great Savings Tip #90 – Prioritize Spending

  • Connie Nichols says:

    Our habit regarding discretionary purchases has always been to ‘sit on it’ for a few months. If the item still seems ‘necessary’ at that time, we might consider making the purchase a bit more strongly, but only after researching quality and pricing thoroughly.

    Also, a keen understanding of the difference between NEED and WANT is helpful.


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