Doing your monthly budgeting can be a headache. Especially if you’re trying it out or constantly getting stuck at starting it. One of the important steps in budgeting is categorizing expenses based on “needs” or “wants”. This can be a challenging step because this differs from one person to another but ultimately helps prioritizing expenses easier for you.
Needs versus Wants
Categorizing “needs” from “wants” allows you to see which expenses are your basic living expenses versus expenses you can actually do without. You can then prioritize which expenses should be on top of your list versus those that you can skip or altogether cancel.
Basic living expenses like those necessary for health, home, or expenses for your job falls under your needs. These could be:
- Utility Bills
- Commute/Gas Expense
- Grocery Budget
- Children’s Tuition & School Expenses
While expenses for entertaining and lifestyle-related ones falls under your wants. These are
- Monthly subscriptions
- Lifestyle membership: gym/spa
- Dining out/Food deliveries
- Travel or weekend getaways
- Social events: Parties, etc
How to know the needs versus wants?
There is a thin line between needs & wants expenses and often times it boils down to it being a lifestyle choice or not. Lifestyle choices are silent budget killers. It can tell you that a certain expense is a need but in truth it is just a preference.
For example, buying groceries in a more expensive shop than going down a couple of blocks to the farmers market is a preference. While you can buy produce at both area, farmers market may have less expensive produce than at the shops. The same goes at renting an apartment at a high business traffic part in the city versus renting less expensive apartment elsewhere. A shelter is a need but the location is the preference.
While there is nothing wrong at going for what you prefer. It will only make things difficult in budgeting when you do not have enough income to cover your preferred lifestyle, thereby sacrificing the other needs & financial goals you also need to pursue.
Is saving a NEED or a WANT?
This is one of the most debate topics when people starts to manage their finances. And if you get too wrapped up about what people are saying, it can be overwhelming. If your budget allows you and you have extra money to set aside for savings, it is highly encourage you do so. These can be
- Emergency fund
- Debt payments
- Retirement fund
Now if you look at this list, these are expenses that are not necessarily a basic need in the present and is also not an immediate need. You can still survive each month without an Emergency Fund or Retirement savings as long as you have a paying job.
However, saving and getting out of debt is HIGHLY considered needs. This is because these are investments for a person’s long-term financial and personal well-being.
For example, having an Emergency Fund is not an immediate need. But in the event of losing your job, having an Emergency Fund is a life-saver. It can buy you 3-6 months without any income while you find and apply for a new job.
Savings is a way of paying yourself first.
It is setting aside money for the financial security
for you and your family.
Following the 50/30/20 Budgeting Rule
Budgeting is to plan where to spend your money and allocate how much money you can spend on each based on expenses categories. The 50-20-30 Budgeting Rule is an ideal way to help you build a budget by using three spending categories
- 50% : NEEDS: living expenses and essentials
- 30% : WANTS: flexible spending on lifestyle expenses
- 20% : financial goals: savings, investments, and debt payments
The 50-30-20 budgeting rule of thumb allows you assign concrete values on each expense categories. This puts you in the position to be strict on how much you spend on WANTS so you do not go overboard and overspend. This budgeting rule also helps you set aside money for savings and investments, so you always have money around.
The key to budgeting is to become more aware
of how you are spending money.
How to adjust expenses?
When you need to save and cut down on your expenses, working on eliminating some of your WANTS is the easiest way to go around it. Since these are lifestyle choices, you can always do without having to spend for these and make alternative solutions.
For example, you can cut off your gym membership and instead of paying for it monthly, you can do your exercises at the park for free instead. You can also cut down you food delivery expenses or your dining out’s and cook home meals instead. You can find alternative solutions to lessen your expenses in your wants lists.
Often times it is also best to tackle your NEEDS list to see if you are living beyond your means. Needs take up the biggest portion of your budget. So you can go through the list and see how you have downsize your expenses.
On good example is to find a less expensive rental. You can cut down a big chunk on your needs by going for a lesser home rental. That way you will have extra money saved from it and place it elsewhere where you need it. You can also downsize with your grocery list. Instead of buying produce at the grocery store, you can go to the farmers market where it is less inexpensive than in the shops.