Well hello there, I am so glad you’ve come back to join us for the final post in this series. Now we get into the nitty gritty of the PEN spending hierarchy.
PEN spending hierarchy
PEN stands for Priority, Essential and Non-Essential. By creating budgets that allocates spending in this order, we start to learn the fundamentals of good money management. Basically, we all have expenses that must be paid for each week, month or year. Some of these are of greater importance than others because of the consequences of not paying them or the importance of the benefit we get from the expense. Other priority expenses might be medical insurance (if you or a family member requires frequent medical attention), car insurance, utilities, food and I would argue – emergency funds and nest egg funds.
For example, as mentioned previously, mortgage or rent will be a priority expense. And the reason is obvious, you need somewhere to live and if you’ve chosen to live on your own, you need to be paying someone for the privilege. In the same way, a fine might be a priority depending on the consequences attached to non-payment. If the consequence is jail time, the fine might be a priority. If it is not, then it might move down to essential or even non-essential.
An essential expense is still important but it’s weighting is below our priority expenses. So your cell phone bill might be an essential expense especially if it is your sole means of communication. For another person, that might not be the case, having a cell phone is not important to them and the consequence of not having one might be negligible (although it is kind of hard to imagine it not being important!). Other essential expenses could be business subscriptions, professional courses or work clothes.
These will typically be wants and rarely needs. These are expenses for things that will be nice to have but really aren’t that crucial in the grand scheme of things. One more pair of Louboutins? Hardly priority when compared to the cost of the shoes going into your nest egg fund where it will grow.
When looking at this hierarchy of expenses, you may begin to despair and think you aren’t allowed to have nice things to be wealthy. Far from it. You can buy your favourite bag or go on your holiday but plan for it and make sure your priorities have been taken care of.
I’d like to point out that all of these expenses can be adjusted to fit within our budget or income, of course. We don’t have to live in that expense flat or house; we can downsize so that it fits within our budget. We can become creative in how we acquire things we want – we don’t have to always buy stuff. Sometimes, we can have our cake and eat it too.
The reason why people who earn a lot of money are broke is because they don’t follow this PEN order of spending.
Once you understand that every bit of money that comes your way can be “purposed” for wealth building, you start to view things differently and hopefully your habits start to change to reflect this new knowledge. So if you could do things over, what spending habits would you change? This question is not to make you dwell in quagmire of guilt but to inspire to move into a new way of thinking and behaving. So are you ready to make the first step towards building your wealth?