Having a budget is essential for financial well-being. Understanding how much money is coming in versus how much you are spending can help you plan for the future while making sure you have enough to live on day-to-day.
One of the biggest areas to pay attention to is how much you spend on “wants” versus “needs.” Everybody has a list of necessities they spend money on each month. These are costs related to housing, healthcare, and other must-have items. Wants are items that we don’t need to purchase, but that might bring some joy. Both are an important part of a budget. But without the right perspective, spending can spiral out of control and prevent you from reaching your financial goals.
Here are a few ways to understand your wants and needs for proper budgeting.
Differentiating Between Wants and Needs
Some expenditures are necessary for everyday living, like mortgage or rent payments, groceries, utilities, and healthcare costs. Wants, on the other hand, are optional costs. These items may include expenses related to entertainment, dining out, luxury clothing or jewelry, and more. Consider whether you truly need or only want something when reducing your expenses. Asking, “Do I need this or do I want it?” can help you to decipher between the two.
Budgets should always include costs related to needs. This helps you evaluate your income against the money you must spend to live. Any extra income should be split between savings and spending on the things you want. Remember, it’s always a good idea to have emergency savings that could carry you through roughly three to six months if you lost your income.
Evaluate your budget regularly, and things may change. You may start working from home, which could reduce your transportation expenses. Or you may need to start taking medication, which may increase your cost of living.
Effective Budgeting Accounts for Both
Wants and needs are both essential parts of a budget. Start by categorizing your expenditures. Examples of items that might go into the “needs” section of your budget include:
- Housing costs (rent, mortgage)
- Groceries
- Transportation costs (public transit fare, gas, car payment)
- Insurance (health insurance, home insurance, etc.)
- Utilities (gas, electric, internet, garbage removal, etc.)
Items that may be categorized under “wants” include:
- Entertainment (movie tickets, gaming consoles, streaming services, etc.)
- Leisure travel (plane tickets, hotel accommodations, cab fare, etc.)
- Branded clothing items
- Memberships at gyms
- Drinks in coffee shops
While these are not comprehensive lists, they should give you a good idea of the types of costs that go under each category. Once you have everything categorized, it’s time to analyze and create your budget. The 50/30/20 method is both popular and influential in this regard.
The 50/30/20 Method
All Your Worth: The Ultimate Lifetime Money Plan was written by U.S. Sen. Elizabeth Warren, who popularized the 50/30/20 budget rule. It suggests that after-tax income should be divided into three categories: 50% for needs, 30% for wants, and 20% for savings.
Needs are 50%
Fifty percent of your after-tax income should be set aside for needs. This includes the cost of living, utilities, transportation costs, groceries, and minimum debt payments. In some cases, needs may account for more than 50% of your income. This may indicate a need to reevaluate your budget and lifestyle.
For example, in down economies, you may find that you need to take a pay cut. This could increase the percentage of your income allocated toward needs. You may ask yourself if it makes sense to reduce some of these costs. You may switch to a lower internet plan or consider walking rather than driving to certain places.
Wants are 30%
The 50/30/20 plan suggests setting aside 30% of your after-tax income for wants. This includes dining out, going to movies or sporting events, taking vacations, and splurging on the latest tech gadget. When you boil it down, everything that falls under “wants” is optional. For example, you can exercise at home and cook meals rather than go to the gym or dine out.
You have much more room to make adjustments in this category of your budget. While these items bring joy, you do not need them to live. So if you find the wants category of your budget getting out of control, you can consider several different options. You may drop one of your streaming channels, downgrade your luxury vehicle lease to something more economical, or choose to cook from home more.
Savings are 20%
Finally, aim to allocate 20% of your income to savings and investments. Investing in the stock market, making IRA contributions, and having an emergency account are all ways to save money. In addition, an emergency fund of three months’ worth of expenses should be kept on hand in case you lose your job or experience an unforeseen event. After that, allocate funds toward retirement or to meet other financial goals.
Tips to Remain Disciplined
Use Visualization Techniques
Visualizing your dream to help yourself stay disciplined and achieve your goals is essential. Imagine your future with a family and a house in your mind — or whatever makes you happy. Then, make this visualization a habit every time you consider spending money frivolously.
Give Yourself Pep-Talks
The power of self-affirmation is tremendous. Besides building self-esteem and confidence, this type of positivity can work with financial discipline. Moreover, self-affirmations are easy to do. Look in the mirror every morning and tell yourself what you will do.
Use Automation
When it comes to financial discipline, automation is a powerful tool. It is easier to grow your savings faster if the money is out of sight and out of mind. In addition, people are more likely to spend money more quickly when they allow the money to directly pass through their hands or view it before they save it. For this reason, consider using direct deposit or auto-transfers.
Shop Smart
Buying the things you need doesn’t have to break the bank. However, buying smarter is always a good idea. Make use of grocery store membership deals by signing up for memberships. Whenever possible, avoid impulse purchases. When treating yourself, you should only do so on special occasions.
Budgeting can be challenging, and many people avoid dealing with it altogether. But with the correct understanding between wants and needs and some handy tips and methods, you can begin your journey to financial stability and freedom!