2010 Financial Focus: Prioritization

Over the past couple years I’ve become very conscious and deliberate with how I manage my money. Even when I don’t make very much (tutoring 6 hours a week during the school year doesn’t equate to a very big paycheck), my financial habits help me get a lot out of what I do make.

At times though, my frugality threatened to become a little bit too much, past the point of sound money management and closer to self-deprivation. I would basically try to save money on everything I did, which is good for your savings but not so much for one’s morale. For 2010, I’m trying to move more towards prioritized spending and away from universal penny-pinching. In other words, I want to pour more money into the things I really care about and ruthlessly cut back even more on the things I don’t (Ramit’s idea of conscious spending has been a big influence on my changing mindset).

Most of us don’t make enough money to save, pay off or avoid debt, and spend randomly on every whim that tickles our fancy. Many Americans default to option three while completely ignoring the first two. Then they stand around scratching their heads when they get a foreclosure notice. The other extreme, where we have huge bank accounts but no life, isn’t much better. If you’re on financially stable grounds yet refuse to turn on the air conditioner in July, you have a problem.

The best solution, then, is to save for the future while prioritizing effectively in the present. Most rational people should do this to an extent, but we can do it a lot better if we explicitly give it our attention. For 2010, there is one key area where I want to consciously spend more without feeling guilty about it:

For as long as I can remember, I’ve had strong feelings of wanderlust (very typical among many people , especially those in a state of endless cornfields). As a kid though, you’re at the mercy of your family when it comes to traveling, so it doesn’t require much personal decision-making. Not anymore. I realized this as my roommate and I were planning our road trip for last spring break, and my desire to go out and explore the world greatly intensified.

This year I have one semi-big trip planned, a camping and backpacking journey to Sedona, Arizona over spring break with one of my best friends. The backpacking part will be my first such endeavor, so there’s a lot of planning involved. I’m a planner by nature though, so this is one of those instances where planning and anticipation is a huge part of the fun.

I find it somewhat ironic however, that backpacking, as an outlet to temporarily get away from society, reconnect with nature, and survive with basically only the essentials, is quite an expensive hobby to pick up. Thankfully my friend’s dad is willing to lend us a lot of the gear we need, but what I have had to buy so far (backpacking boots and a 90 liter bag) hasn’t come cheap. I can already tell that it’ll be well worth it though. I joked with my friend that we’ll probably spend the majority of the 20+ hour drive back to Iowa deep in discussion on where we want to go next.

In order to invest more resources in traveling, and more specifically this one trip, something has to give. It should be obvious that I don’t plan to compromise my long-term financial objectives, so I need to eliminate spending elsewhere (given that my income will likely be fixed until summer).

My expenses are already low in most areas, but I think I can be even more meticulous with my spending in my day-to-day entertainment (eating out, drinks, movies, etc). Like I said, I don’t spend all that much in these areas as it is, but I could still cut more for the sake of saving for my trip. I don’t want to be a scrooge who refuses to ever spend a dime out on the town, but I’m certainly not going to eat out multiple times per week and buy a 24 case of Bud Light every weekend, as some of my peers do. Spending liberally on these things isn’t a prerequisite for having a good time, and in the end I’m going to get a lot more satisfaction out of camping under the Arizona sky than I would by consuming a copious amount of beer every weekend.

In addition, I’ll continue driving my Civic like a grandma to save gas and using my far outdated LG flip-phone. It feels like I’m one of the few who still relies on a real computer to check emails and update my Facebook status, but for now I can survive with my cheaper phone and basic contract. After all, even though my grandparents have trendier phones than I do, it still makes and receives calls perfectly fine.

You can’t have it all, but we can do a lot better with the resources that we have simply by giving a little thought to how we utilize them. I plan to update my progress throughout the year.

Prioritization

The fastest way to ensure that your budget fails is by attempting to apply frugality equally across all aspects of your life. An effective and sustainable personal finance plan doesn’t include deprivation. It instead allows us to spend more liberally on things we really care about, and cut back on things we don’t.

It’s an objective fact that resources are limited (just don’t tell this to law-of-attraction crazies), so it only makes sense that we should employ said resources in the most efficient way possible. Heck that’s essentially basis behind the field of economics. But do we actually do this?

Humans are semi-rational beings, so we should tend to prioritize even when we don’t consciously think about doing so. Unfortunately, “should” is probably the key word in that last sentence.

To successfully set our priorities straight, we must honestly answer the following question; what is it that we really care about?  Identify the areas where the prospect of being thrifty makes you nauseous.

-Say you’re an avid mountain biker- what would your reaction be if I suggested you buy your next ride at Wally World?
-Or maybe you’re a classic car buff- are you planning to trade in your ‘67 Charger project car for a late-model Toyota anytime soon? I didn’t think so.

For me, a good example is basketball shoes:

Sure I could go to Payless and get a pair for $19.99, but the chances of that happening are about as good as me sporting John Stockton-style short-shorts while playing.

I’m prepared to spend anywhere from 3-5x that much on a pair that are durable, offer plenty of ankle support, and are still comfortable even after 2+ hours of running up and down the court.  And of course, they have to look pretty sweet, because maybe more so than any other athletes, basketball players are obsessed with how their footwear looks. I’m no exception. 

It’s easy to identify things that we value, but that’s only half the equation. We must also identify what we don’t care about. This can be tougher, because it involves conceding that we must cut back in some ways in order to invest more resources elsewhere. However, if we want to maximize our total satisfaction (or utility, for any fellow econ nerds), we must ruthlessly cut back on the things that mean little to us.

Personally, I don’t care about having a fancy ride. My plain-jane Civic is fine with me, even though it’s lacking in all the creature comforts that have been standard on most vehicles for some time now (no power windows or locks even). I don’t mind driving a Spartan car as long as it’s efficient, reliable, and safe.

It hasn’t always been like this though; not all that long ago my nose was constantly buried in Sport Compact Car magazine, brainstorming how I was going to trick out my future Mitsubishi Lancer Evolution.

Somewhere along the way though, I realized that spending an enormous amount of money on a car wouldn’t really add much value to my life, and that I could think of a ton of better ways to invest the money. While I won’t deny that I would enjoy having one, the benefits of buying a kickin’ ride (more egotistical than anything) wouldn’t come remotely close to overcoming these realizations.

Where do you spend your money more liberally, and conversely, in what areas do you not care to spend much at all?