There is a famous quote attributed to Peter Williams that states, “You can have anything you want. You just can’t have everything you want.”
There is a lot of wisdom in that statement. It exemplifies the importance of creating personal priorities so you can achieve your goals. I have been reasonably successful when it comes to managing my personal and business finances. And much of that is due to setting priorities for saving and spending and sticking to those priorities. Here is my saving story.
Start by Identifying Values and Setting Spending Priorities
I start by identifying what matters most to me. This helps keep me on target and reduces the risk of frittering my money away and wondering where it went. This starts with identifying my values. You can apply this to your life as well. Recognize what is important to you. Be honest. Whether that is spending time with friends and family, supporting expensive hobbies, giving back to your church or favorite charity, saving for retirement or your children’s education, or anything else that requires time and money.
Next, you have to commit to saving and spending according to your values and according to your obligations.
How I Prioritize My Saving and Spending
By prioritizing my savings, I mean I pay myself first. I started this with an Emergency Fund, which I believe to be essential for any healthy financial plan. My personal Emergency Fund has varied in size over the years. At first, it was a thousand dollars, which was enough to handle most medium size emergencies, such as car repairs, an emergency airline ticket, etc.
Gradually, I grew my Emergency Fund to reflect my ongoing financial obligations and my growing family. That $1,000 Emergency Fund turned into a full month of expenses, then 3 months of expenses. Now that I am self-employed, I try to keep about a year’s worth of living expenses on hand. It took a long time to get there, but I feel it’s an important safety net for my family.
Retirement savings is another area where I prioritize savings. I started my first IRA at age 19. I have maxed it out almost every year since then, even when I wasn’t making much money. I also contributed to employer-sponsored retirement accounts, including the TSP when I was in the military, and a 401k when I transitioned into the civilian world. I haven’t always been able to max out my 401k, but I have worked hard to at least fund it to the company match.
You likely have multiple savings goals, and finding a balance is important. This is why it’s important to start by identifying your values and priorities. Once you look at it through that lens, most of the decisions are self-evident.
I Spend Where it Matters Most (to Me)
Saving money is great, but I’m not a miser. I save so I can spend where it matters. There are a few things I am willing to splurge on. This includes business expenses where I expect a positive Return on Investment, and experiences for myself, or with my family. This can be travel, adventure, time with family, dining out, etc.
My wife prioritizes her spending on healthy foods and health care products. This is important to her, so it’s important for our family.
Our children’s education is another area where we are willing to spend money (or save in college savings accounts). These things are important to us, so we are willing to sacrifice in other areas.
I Cut Costs on Things That Don’t Matter As Much (to Me)
Everyone has different priorities. This is neither good nor bad, so long as you can afford the things you are prioritizing. The way I do it is by cutting back on the areas that aren’t as important to me.
For example, I drive a 12 year old car. I bought it brand new, and have taken very good care of it in the time I have owned it. The car isn’t fancy; it’s a Mazda 3. But it’s functional, safe, and efficient enough. While it would be fun to have a new car, it isn’t that important to me. At least not more important that having experiences with my family. Or saving for retirement. I can come up with dozens of other things that aren’t more important to me than the items I mentioned above.
You can have your priorities. Even if they are extravagant. Just make sure you are able to afford them, even if it means cutting back in areas that aren’t as important to you. Sticking to your priorities is a great way to avoid lifestyle inflation. Spending more simply because you can afford to do so is never a good reason.
Track Your Savings and Investments So You Know Where You Stand
The final thing I do is track my progress. It’s important to keep track of what you are spending and what you are keeping. This gives you an idea of your current state of affairs, helps you track your progress, and often shows you where you can make improvements. I track my savings and investments in two ways.
The first is with an Excel spreadsheet. It’s simple, and the manual updating each month ensures that I log in to each account and look over everything. The spreadsheet is handy for tracking my annual contributions (IRA, 401k, and HSA), and when certain payments are due, such as my quarterly estimated taxes. I also like the manual method because it gives me the opportunity to see how each account has tracked over the previous months and years. It’s the same information found in many software programs, but I have the flexibility of how I see it.
But spreadsheets aren’t always as powerful as software. Which is why I also use different tools to track my finances – including my banking (saving and spending) and my investments. I am currently using two different free money management software programs, both of which have some excellent features. I highly recommend them if you want to track your saving and investments:
Personal Capital and Mint.com are both free tools that give you insight into your finances. Mint.com excels at budgeting, and Personal Capital offers a more robust set of tools, including recommendations on how you can better allocate your investments. Both have some similarities and slight differences. I highly recommend using one or both of them to get a quick financial checkup and to help you track your finances going forward. Compare the Mint and Personal Capital apps.
Frequently Review Your Progress
Updating my finances each month helps me keep track of my progress and I will quickly know if I am sticking to my spending and saving priorities, or if I’m straying.
There are several variations of this quote,
“Show me a man’s checkbook, and I’ll show you his priorities.”
This is a powerful statement because it rings true. Tracking your expenditures and reviewing them will show your true priorities. It’s one thing to say, “I want to save $1,000 before summer so my family and I can take a vacation.”
But is that a true priority if your savings account only has $200 in it, but your recent spending includes frequent lunches out and shopping trips for non-essential items?
What to Do if You Are Struggling with Your Financial Priorities
I’m sure none of us have perfect financial lives, myself included. We all have areas where we struggle – whether that is spending too much, carrying too much debt, not saving or investing enough, or something else. The key is recognizing our habits and setting priorities accordingly.
Here are some action steps you can take if you find yourself struggling with your spending priorities.
What are the Motivations Behind Your Purchase?
Look for the motivations behind a purchase you are making. Do you really want a bigger TV, or do you think that you are “supposed” to have one so that you can impress the neighbors or your relatives when they come over? Do you really want to load up on all that junk food? Or are you hungry right now, and vulnerable while grocery shopping? Do you really want that new shirt? Or is it something that looks like it would be fun to have right now?
Often, when we buy something without thinking through our motivations, we come to regret it later. There are a number of things that I have that I don’t particularly care for and that I wish I hadn’t bought. If I’d thought it through a little bit, I would have realized that I was just temporarily interested.
Really examine why you are buying something. Figure out whether you are making a purchase because you really need it, you think you want it, you’ll really enjoy it for a long period of time, or because you are trying to impress someone else. You might be surprised at how often you only think you want something because of a short-term fad, or due to a passing fancy that is likely to disappear after a couple of weeks. You might also be surprised, when you really get honest with yourself, how often you make purchases because you want the status that comes with certain items.
Remind Yourself of Your Priorities
The best way to combat the tendency to buy things you don’t need — or even particularly want — is to remind yourself of your priorities. Before you make a purchase, consider the following:
- Will this purchase help you reach your long term goals for your finances?
- Will this purchase actually enhance your life? Really improve your quality of living?
- Can you even truly afford it?
- What will you have to give up in order to make this purchase?
The first two questions are especially important if you want to make sure that your spending matches your priorities. Look to your future and decide what you want out of life. A lot of the spending choices you make now can affect your situation later. That expensive SUV might be fun to drive around, and it might help you look good in front of your friends and family, but the cost of it can trap you. Additionally, the fact that you had a fancy vehicle now will be little comfort when you don’t have enough money to travel as much as you would like during retirement.
Really think about your purchases, and really examine the “why” behind your purchases. Then figure out if the reasons match up with your short term and long term goals for your finances and your life. Once you start thinking this way, it will be easier to make meaningful purchases and avoid buying things that put your future at risk.
Here’s a 3 step method that will help you get your priorities straight:
1. Find out if there is a problem or not. If you can afford your spending habits, go for it. But if not, it’s time to take action. You probably already know if your spending is out of line with your income. (One subtle hint of this might be when you notice that the only people who call you are bill collectors).
2. Write down what is going to happen if you don’t fix the problem. What will happen if you are running a deficit each month? Will you just dig a deeper hole, or will the debt become insurmountable? Will you lose your car? What about your house? Will you ever be able to retire? These are real considerations for many people.
3. Decide if you are willing to pay that price. Taking a hard look at your spending can be a difficult wake-up call. But it may inspire you to action. If not, decide if you are willing to pay the price of living paycheck to paycheck, or feeling the pressure of debt. Or delaying your retirement. Or in the worst case, losing your home.
My experience tells me that we have an endless list of wants. It’s human nature. The need to satisfy our wants is made greater by constant encouragement from television and other media outlets. Nothing wrong with having wants. But just because we have wants doesn’t mean we can afford them.
By going through this process on a step-by-step basis, you’ll be able to identify those wants that you really can’t afford and have a process by which you’ll be able to wean yourself from them.