Prioritizing Your Expenses.

On this page, you will:

learn how to prioritize your expenses to free up enough cash for you to achieve your goals

After you have built your cashflow statement, then it is time for you to start prioritizing your expenses. If you need help in preparing your personal cashflow, read the tutorial on how to build your cashflow statement.

Also, by now you should have calculated how much you need to save to achieve your goals. If you need help in finding out your monthly savings, then read the tutorial on how to calculate your monthly savings or use an online savings calculator.

Now, look at your annual cashflow in your cashflow statement. If you have annual cash inflow, then divide this amount by 12 months to get your monthly cash inflow. Then compare your monthly cash inflow with your monthly savings for goals.

If your monthly cash inflow is MORE than your monthly savings, then you have a working budget. All you need to do is, use your extra money and save it towards your goals.

If your montly cash inflow is LESS than your monthly savings, then you need to relook at your cashflow and see where you can find the extra money. You need to prioritize your expenses and cut down on less important spending.

If your annual cashflow is an outflow, then you also need to relook at your cashflow and prioritize your expenses and cut down on less important spending. Your task is harder because you start off with a negative cash flow. However, it is not impossible because there are many ways to reduce spending.

In the Cashflow Statement Example, there's a column “Priority”.

Label 1 for most important, followed by 2 for the next important and so on. Assign a priority number on all your expenses.
Then cut spending on the least priority item. When you have cut down to the minimum, then move on to the next priority item and cut that expense.

Example: Prioritizing expenses.

Assume I have 5 items in my cashflow and these are listed with their corresponding priority as below.

expenses	Priority	Version 1 (before)	Version 2 (after)	Savings
Rental	2	300	300	0
Food	1	450	400	50
Traveling	3	300	250	50
Communi- cations	4	100	80	20
Enter- tainment	5	200	100	100
Total		1,350	1,130	220

Note:

I start cutting down expense on my Entertainment first because that item is the least important in my whole list. I can't live without entertainment but I guess I can cut back some. I think I can halve my entertainment spending by staying in more often.
Next I look at Communications. Not much I can cut down. I figure if I am staying in more often, then I could use my fixed line more often instead of my mobile line. Possibly could save $20. Looking forward, I should switch to other networks offering better call rates if there is any.
At the minimum I need to travel to work and shop for my groceries. Maybe I could avoid the traffic by driving to work earlier. This should save around $50 worth of gas. Looking forward perhaps I can carpool with someone working at or near my office.
There is nothing I can do about the rental rate for now. Looking forward, I should check if there are other rooms renting out cheaper than $300.
Dine out less often. Then I should be able to save $50 on my food budget.

In total, I have managed to find an extra $220 by cutting down on some of my expenses.

Update your cash flow worksheet with new expense amounts. Compare to see if the annual cash flow is enough to satisfy the amount you need for your monthly savings. If yes, then you have a working budget. If no, then you can:

Continue cutting down on your spending until you can satisfy this amount.
Find ways to increase your income to satisfy this amount.
Revise your goals to bring this amount lower.

Next: Reducing Your Expenses.

Previous: Analyzing Your Net Worth.