Some expenses are necessary—like a roof over your head, electricity in your home, and gas in your car to get to work. Other expenses are more about enjoyment, such as tickets to a show or dinner and a movie. You can incorporate both into your budget and still set money aside for emergencies if you manage your budget with care.
Discover the secrets to balancing your financial needs and wants by continuing to read.
Determining Needs
Financial needs are expenditures that are essential for you to live and work. These recurring expenses typically consume a large portion of your paycheck—think mortgage payment, rent, or car insurance.
Here are some common expenses that fall under needs:
- Housing: Rent or mortgage payments.
- Transportation: Car payments, public transit fares, or fuel.
- Insurance: Health, car, and home insurance.
- Utilities: Gas, electricity, water, and internet.
- Food: Groceries and essential household supplies.
Identifying Wants
Wants are expenses that enhance your comfort and enjoyment of life. These are the items you buy for fun or leisure. While you could technically live without them, they make life more enjoyable. For instance, while food is a need, dining out regularly is likely more of a want.
Wants typically include:
- Travel: Vacations and weekend getaways.
- Entertainment: Movies, concerts, and streaming services.
- Designer Clothing: High-end fashion and apparel.
- Gym Memberships: Access to fitness facilities.
- Specialty Drinks: Coffeehouse beverages and premium teas.
It’s important to note that wants and needs aren’t the same for everyone. You may need a car to commute to work, but the type of car you require can vary. If your job necessitates driving high-powered clients around, a luxury car might be a need.
However, if you’re simply commuting to an office, a more affordable car will likely suffice.
The same applies to smaller items, like a new coat you’re eyeing. Outerwear is essential for protection against the weather, but if you already have several coats, that new jacket is probably a want.
Budgeting for Both Needs and Wants
How do you begin incorporating wants and needs into your budget? Begin by listing all the things you buy—everything from toilet paper to insurance. Next, categorize your expenses into broad groups such as toiletries, cable, phone, and insurance.
Divide these categories into two buckets: wants and needs. For example, we’d place insurance and a basic phone plan under needs, while a Netflix subscription and deluxe cable package would fall under wants.
Tally the Totals and Align Your Priorities
We recommend the 50/30/20 budget rule. According to this method, you should allocate 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment. Plug your monthly take-home income into a budget calculator to determine how much you have available for each category.
If your current spending is unbalanced according to the list you created, there’s good news—you have the ability to make adjustments. Here’s a simple way to start:
Move Things Around : Take a close look at your categories. Some items you’ve marked as needs may actually be wants, or vice versa. For example, if you deem a daily coffee run a need, consider brewing your coffee at home instead.
Trim Spending on Needs: The cost of necessary spending isn’t always fixed. Shop around for better rates on your phone plan, cable package, or even insurance. For instance, shopping around for car insurance could save you more than $400 per year, according to a analysis.
Trim Spending on Wants: Consider reducing your discretionary spending if it’s dominating your budget. Limit how many days you dine out or opt for more affordable lodging the next time you travel. Minor adjustments in your spending habits can lead to substantial savings over time.
Implementing the 50/30/20 Rule
Let’s break down the 50/30/20 rule further:
50% for Needs
This portion of your budget should cover all the essentials you need to live and work. Make sure to regularly review these expenses to see if there are any opportunities for savings.
30% for Wants
This category covers discretionary spending—things that make life more enjoyable but aren’t essential. Be mindful of this portion, as it’s easy to overspend on wants.
20% for Savings and Debt Repayment
Finally, this part of your budget should go towards building your savings and paying off any debt. This not only prepares you for future financial needs but also helps you achieve long-term financial goals.
Adjusting Your Budget
If you find that your spending doesn’t fit neatly into the 50/30/20 categories, don’t worry. The key is flexibility and making adjustments as needed. Here are some tips:
Review and Adjust Monthly
Regularly review your spending habits and make adjustments. This practice will help you stay on track and make informed decisions about where your money goes.
Set Financial Goals
Setting clear financial goals can inspire you to adhere to your budget. Whether it’s saving for a vacation, paying off debt, or building an emergency fund, having a target can keep you focused.
Use Budgeting Tools to manage your budget
There are numerous budgeting tools and apps available that can help you track your spending and manage your budget. These tools can provide insights into your spending habits and areas where you can cut back.
Managing your budget effectively requires balancing your financial needs and wants. By understanding the distinction between the two and implementing a structured approach like the 50/30/20 rule, you can achieve financial stability and enjoy the things you love without compromising your future.
Remember, the goal is to create a balanced budget that allows you to live comfortably while preparing for the unexpected. With careful planning and regular review, you can manage your budget effectively and achieve your financial goals.
