One of the very first steps that you need to do in setting a personal budget is writing out your needs and wants. What I consider a want, you might consider a need and vice versa. Sometimes the line can be a tad blurry so we’re going to look deeper at how to really determine which is which.
Needs
Simply speaking, needs are things that you can’t do without. Obvious examples are food, shelter, and clothing. It’s what you must have to survive as compared to what you’d like to have. Some other examples include:
· Utilities
· Healthcare
· Medications
· Work uniforms
· Transportation
Wants
Wants are the items that you’d like to have, but don’t need to survive. These are all pleasant items that most of us want to have. They may even help you to keep in touch with family or friends, but ultimately, they are not needs. Examples include:
· Dining out
· Entertainment
· Travel
· New and excessive clothing
· Upgrades on items when nothing is wrong with them
· Electronics and gadgets
· Memberships and subscriptions
· Streaming services
If it was as simple as knowing and only purchasing needs, no one would ever have money problems and debt wouldn’t exist. There are many wants that can masquerade as needs. Having internet at home is a need if your job is done at home, but if you only use it for surfing the web, streaming, gaming, or looking at cat videos, that would be a want. If there is a school aged child, it’s also a need for homework. **It’s important to note that you can use the computers at the public library for free and Wi-Fi is prevalent almost everywhere.
Under needs, food and nourishment is a main component. However, food can be a hybrid expense. You need it to live, for sure. Proteins, produce, and whole grains are a necessity, but what about chips, soda, and zebra cakes? Those would fall under the category of wants. In addition, you may need food, but it slips into wants when you go out to eat when you could make something at home. Fast food and dining out may be convenient, but it’s not considered a need.
On the flip side, there are also needs that could be masquerading as wants. Electronics and specifically a mobile phone would appear to be a want. However, some kind of phone may be required to have a job, keep in touch with family, or order medication. Do you need a phone that costs $1,000 to accomplish that? No. A phone may be a need on some level, but a want when you start adding all the extra features. A $20 flip phone may fill that need. Another example would be purchasing organic fruits and vegetables over standard grown. The bottom line is if it’s worth it to you and if you can afford the extra expense. Being aware which expenses are not optional will help you keep on track for your budget.
Now that we’ve broken down many wants and needs for everyday items, what about things outside the box beyond that? Where do expenses like emergency funds, paying down debt, retirement, college funds, insurances (life and disability) fall? Clearly you don’t need those to survive and live, so many would place them into the wants category. However, one can make a case that these are all nebulous and could cross back and forth over the line depending on your age and where you are in your life. Life insurance may not benefit you today, but if you pass away, it would likely be a need for your family in dealing with funeral expenses and support surviving children. I believe that these items tip a little closer to the need category even though it’s not a need for today. Whether you’re able to save $5/month or $5,000/month, I personally believe that it’s a priority that must be pursued along with your other needs. 38% of people have no money set aside for retirement, so don’t let that be you.
Budgeting
Once you’ve evaluated and categorized your needs and wants, you can start working on your budget. The 50/30/20 rule is a simple winner that is easy to implement.
· 50% of your net income (after taxes) is spent on needs
· 30% on wants, and
· 20% on savings and debt payoff.
When people think of budgeting, they think that they will be locked in their home and have no life experiences that cost any money. With a budget of 30% on wants, you have some flexibility to do some fun things for yourself. It’s important that you stick to that amount to avoid overspending. With too many restrictions, you won’t stick to the plan and can struggle to make any progress. That being said, if you can reduce your needs and wants even lower, you will be able to sock away a larger amount for investment and your future.
How to Stay Within Your Budget
After your calculations, you may discover that you’re spending far above your percentages. Many people are spending more than they make even without making any contributions to debt payoff and savings. Now may finally be time to start adjusting your expenses. Needs may be 50% of your budget, but rethinking how they look can be a game changer for your finances. Let’s review some ways to reduce your expenses.
Housing Options to Reduce Expenses:
· Move into a smaller apartment/home
· Get a roommate
· Move in with family (even if only temporarily)
· Get rid of cable
· Cancel any subscriptions
· Lower thermostat in the winter, raise in the summer
· Have a utilities evaluation done on your home to reduce expenses
Work Expenses:
· Bring lunch to work instead of eating out
· Carpool if possible
· Take public transportation, walk, or bike
· Buy basic clothes to make multiple outfits
Grocery Shopping:
· Meal plan around the store sale flyers, specifically BOGO items
· Stock up on staple items when BOGO
· Buy off brand or generic items
· Buy meat and produce that have been marked down for quick sale
Needs, wants, and budgets all go hand and hand. Creating a plan and sticking to it can get you on track to paying off debt, creating savings and investments, and feeling unburdened financially. Begin by using these tips to stay on track to get to your goals.
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