Every budget has both needs and wants. Understanding the difference between the two and how to appropriately budget for each is key to financial freedom.
Needs, as the name implies, are essential expenses for you to be able to live and work. They recur on a regular basis and likely take up a large portion of your paycheck. Some examples include: housing, transportation, utilities, food, insurance, etc.
On the other hand, wants are expenses that enhance your lifestyle. Food is a need, but a latte from Starbuck is a want. Other wants can include things like travel, entertainment, designer clothes, gym memberships, etc.
Determining if something is a need or a want varies a bit from person to person, but it basically boils down to one simple question: can you live without it. If the answer is no, it’s a need. A prime example of this is a car. Here in rural New England, you likely need a car to live since there’s not any real public transit except for in the city, but you don’t need a car that costs you $1000/month.
Budgeting for Needs and Wants
Start off by making a list of everything you buy from tissues to your mortgage or rent and then divide them into large categories like toiletries, utilities, etc. Then separate the categories into needs and wants. For example, insurance and a basic phone plan would be needs whereas Netflix and top of the line cable are wants.
After dividing your expenses into needs and wants, begin building your budget. One basic rule of thumb suggests 50% of your income goes towards needs while 30% goes to wants and 20% is put towards saving and paying down debt. If you look at your current spending and notice that things are out of alignment, it’s time to make some adjustments.
To do this, consider moving things around. Revisit those categories and be sure everything is in the right place. Also, look at how you can get the things in your need category more cheaply. Speak with your insurance providers and other carriers to determine where you may be able to save some money each month.
Finally, cut back on how much you spend on wants. It only takes a few seconds to stop and ask yourself if this is something you really need. This doesn’t mean dropping them entirely. Instead, get creative about how you can have them less expensively. Stay at a cheaper hotel or Airbnb rather than a 5-star resort. Or buy those designer jeans from a consignment shop instead of new off the rack. There are plenty of free budgeting tools on the market. Our favorite is Mint.
Making a few small changes can help ensure your financial freedom while still having everything you need and want.