Financial Literacy: How to Prioritize Your Spending

One of the most important things you can do for your finances is learning how to prioritize your spending. Understanding what matters -- and what doesn't -- can make a big difference in your long-term financial situation.

Here's how to start thinking about your money in terms that can help you make better financial choices for the rest of your life.

Needs vs. wants

Knowing the difference between needs and wants is one of the most basic concepts in money management, but it's one that trips us all up on occasion, and can be hard to master. Being able to figure out what is a need and what is a want is a fundamental building block for all financial literacy.

Needs are required for survival. These are the items you must have in order to survive. Food, clothing, shelter and a way to earn money for your living expenses are needs. The bills you pay are often extensions of your needs. Insurance costs and utility payments are part of your living arrangements.

Wants are the things that we buy in order to make life more enjoyable. You can live without these things (although it might not be as fun). You don't actually require a TV to survive. Eating out might fall under the category of "food," but the reality is that you don't need to do this. You can survive just fine on what you buy from the grocery store.

When deciding how to prioritize your spending, you should start with your needs. These are things that your money should go toward first. After your needs are taken care of, then you can start thinking about the wants you hope to purchase with your money.

How to prioritize other spending

Once you are clear on needs and wants, you can start thinking about prioritizing your other spending. Chances are that, even if you have enough money to cover some wants after you have paid for your needs, you probably can't buy everything you would like to have. This means you need to figure out which items will take precedence in your spending plan.

The first step is to decide what matters to you in your life. Think about your values, and what you want your money to accomplish. Decide what's most important to you. There are no wrong answers here. Some of the things that many people value include:

• Travel
• Providing opportunities for their children
• Giving to charity/helping others
• Supporting a hobby
• Saving for retirement
• Paying off debt
• Building an emergency fund

You might have other priorities, or decide that some of the items on this list aren't important to you. Take a few minutes to sit down and jot a few ideas about what matters most in your life. Then order those things according to what is most important to you.

If you think that paying off debt is the most important thing you can do (after your needs are taken care of), it doesn't make sense to pay for cable TV every month if it's hindering your efforts. However, many of us make these types of spending decisions automatically because it's "normal."

Be honest about what really matters to you. Stop thinking about whether or not you "fit in" with those around you and focus on how you can create the lifestyle you want to live. When you know how to prioritize your spending, it's less painful to say "no" to yet another gadget when you know that you are saving for a better retirement or a memorable family vacation.

Once you are clear on your priorities and what matters to you, be sure to stop and ask yourself if each purchase you make matches your priorities. This will help you cut back on unnecessary spending. You'll be able to save more money for your goals, and feel more satisfied with your life.

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