When you are ready to create a budget, understanding your spending is the key to controlling your finances. One of the most significant and challenging steps is to categorize your expenses by whether it’s a “need” or a “want”.
Every person may explain these expenses in a different way. People who have trouble living without their wants often miscategorize their wants as needs.
It’s time for you to finally understand the difference between these spending categories and budget successfully.
What Are Needs And Wants?
What should you do when you decide to go on a budgeting journey? Right, you need to categorize your spending. Some people do it in writing form, others prefer a budgeting spreadsheet.
Some consumers even choose a budgeting app that syncs with their bank account and saves their time. So, your expenses need to be divided into needs and wants. The “needs” category comprises expenses that are absolutely necessary for your survival and well-being.
The “wants” category includes things you would like to get but doesn’t require. Needs can also be called fixed or mandatory expenses whereas wants may be called variable or discretionary.
When consumers struggle to pay for their needs, they aim to get a guaranteed 10 000 credit card limit for bad credit but does it exist? No, the closest thing you may obtain is a secured credit card that allows you to put in a deposit.
The reason for that is that it’s hard to find a lender who will provide 100% approval of such a big loan to a borrower with poor credit.
Examples Of Needs
A need is something necessary to function and live. These basic living costs include:
• Utility bills
• Mortgage or rent
• Health care
• Travel expenses
• Work uniform
Examples Of Wants
A want is something that can improve your quality of life. These expenses include:
• Eating out
• Home purchases
• Monthly memberships or subscriptions
Listing Your Needs And Wants
Once you understand the difference between these types of expenses, it’s time to list your own needs and wants. You should start with needs or essentials. List down your rent or mortgage costs, groceries, commuting costs, as well as insurance coverage.
After that, you may mention your wants and discretionary expenses. You might get stuck on a certain item and doubt where to place it. In case this happens, you should ask yourself the following questions:
• Can I fill this need in a cheaper way?
• Do I really need this item to function and live?
• Would my life change if this item wasn’t a part of it?
If you have taken out a mortgage to become a proud homeowner but can’t cope with payments, you may look for ways to refinance your mortgage. This option allows consumers to obtain a new mortgage on new terms and take advantage of lower interest rates.
Is Saving A Need Or Want?
Consumers who live on a tight budget may experience issues with saving toward their emergency fund or long-term financial aims including retirement fund, debt repayment, life insurance, or disability insurance.
You may view this spending category as want because it isn’t your urgent need. You can survive now if you don’t contribute to your emergency fund or a retirement fund this month.
However, it will make a difference in the long run as it takes quite a while to establish a solid savings account and you can’t predict when the next curveball of life might happen. Getting out of debt and saving should be considered needs.
These are your long-term investments in financial well-being and security. It may be tempting to avoid having life insurance as you are feeling healthy and strong now.
But the time will go and unforeseen medical expenses may hit you all of a sudden. Whether you can set aside $50 a month or $5,000, planning for your financial stability should be taken care of.
Appropriate Budgeting Method For Needs And Wants
Experts advise people to use the 50/30/20 budgeting strategy as it allows them to combine their needs and wants to live a comfortable and balanced life. If you apply this budgeting method, you should break down your monthly costs as so:
• 50% of your after-tax income goes to needs
• 30% of your income goes to wants
• 20% is spent on debt reduction and savings
As you can see, this division is rather convenient as it allows you to have a balance between your necessities and things you want to have in your life. There are no strict limitations or elimination of wants.
You may still have your Netflix subscription or dine out at the weekend provided that you have divided your income into these three categories and thought about your needs first.
You have the right to spend 30% of your income on things you want. When you begin assigning a particular value to your wants, you prevent yourself from falling into debt and overspending.
These two things are the common mistakes people make when they try to budget and the main reason why they don’t see positive results. The key to managing your funds is to become aware of how you spend your money.
It allows you to ensure your spending aligns with your financial priorities and spend within your means.
Adjust Your Spending
In some cases, you may need to cut down on wants to save more funds or repay existing debt faster. You can adjust your spending on wants to have more money for such aims.
Why don’t you move to a smaller apartment or house if you can’t afford expensive rent? How about giving up your gym membership if you go there once a month?
Besides, you may opt for public transport or carpool with a coworker to reduce commuting costs. As we can see from the 50/30/20 budgeting method, needs comprise the biggest portion of our budget.
If you rethink your needs category, you may maximize your savings and see changes in your monthly spending.
The Bottom Line
Many people don’t realize the difference between needs and wants. Many things that you consider need actually want.
A relevant budgeting strategy may help you define your current financial priorities, lower your spending, and save enough for your long-term financial goals.