Spending and expenses are like little fires everywhere that need to be doused to take control of your budget.
While creating a monthly budget your needs and wants have to be categorized as it forms the basis for your savings.
It can be really confusing and tricky as the needs versus wants can vary from person to person. You can easily fall prey to miscategorizing wants as needs if you can’t imagine your life without them.
Budgeting can be a successful exercise only if you are good at separating your expenses into wants and needs.
How To Identify Your Needs vs. Wants?
The equation is simple, when you are separating your expenses into needs and wants it is very clear that expenses that lean towards those necessary for your survival and well-being are the actual ‘needs’. Anything outside the needs can be termed your ‘want’ because that is something you would like to have and not a necessity instead.
Needs can be referred to as fixed or mandatory expenses and wants as variable or discretionary expenses. Needs are the basic expenses that will never leave you as they are part and parcel of everybody’s lives. These could be:
- Mortgage or Rent
- Utility bills
- Healthcare and medication
- Food and groceries
- Commuting or transport
The current pandemic has tightened a lot of things that were never a need but were forced to fall under this category by people. Want are things that you fancied to buy without which your life looked incomplete but times have changed and the need of the hour is to rethink while you get more constructive in saving money.
Wants are not all that bad and it helps in having fun and keeping in touch with your loved ones. However, do you really need them for survival? That is the question you should be asking yourself. Some of the common things include:
- Entertainment
- Dining out
- Travel
- Electronics
- TV Monthly subscriptions or memberships
- Shopping for new clothing
The Other Way Around
The line between needs and wants has been blurred in recent times following the pandemic. It can be challenging to differentiate which expenses belong to which category.
Home internet and online shopping were a choice but everything changed with the lockdown. The tendency to overspend online is a known behavior but you simply can’t avoid it right now so it becomes a need than want even though you are unable to save money on the delivery charges.
Splitting Expenses
Using the internet exclusively for entertainment may be a want since the sole reason for the internet is to keep your other daily needs running like work from home, ordering groceries, paying your bills, and so on.
Likewise, groceries are a need and there is no avoiding them because it feeds your hunger. But while shopping for your groceries if you pick up those alluring soda and chips then those are wants rather than needs.
Choosing The Right Option Matters
Expenses are no doubt your needs but choosing a specific option under that category is a want. For example, switching phones can be addictive; the purpose of a phone is to communicate with co-workers, family, or for any emergency. All of these can be accomplished with a less expensive phone but if you go beyond that just because the features of a much expensive phone look attractive then it is suddenly a want.
Not all the time choosing want over a need is bad for example if your doctor has advised you to include organic food in your diet then spending on these is worth the money for you.
Changing your lifestyle and being conscious about categorizing your needs and wants can help you to create an effective household budget.
Does Saving Come Under A Want Or A Need?
It’s both a tough and easy question to answer but eventually, savings is mandatory. The difference lies in how soon you get into the act and tighten the strings, the faster the better.
Financial health depends on the inflow of funds and how they are managed. Even if one of them is off-track then your savings dream will be derailed in no time.
Right now, savings can either be consistent or nil and in fact, it is not even in your list following the current situation prevailing due to the pandemic. The challenge is to try and make some savings without paying too much heed to the numbers.
Budget can be tight and it stops money from flowing towards long-term financial goals and savings such as:
- Paying off debt
- Emergency savings
- Life insurance
- Retirement funds
It is natural for you to think about only survival instead of transferring funds for the above-mentioned priorities but the point to be noted is they matter the most when your options are fast running out. Imagine if you had no savings and the pandemic strikes? Scary, isn’t it?
Savings in today’s world is a necessity for survival if not for the future at least for a catastrophe. Hence, the answer is savings is a need, and getting out of debts can’t be left out because it decides your well-being too. Life insurance can be of no use to you at present but if you should pass away then the onus should not be on your family to carry on with their normal lives.
50/30/20 Rule
The 50/30/20 budgeting system is a very popular form of savings method but with unexpectedly tough times ahead it needs to be modified to suit the on-going financial crisis. Under the budgeting system the expenses will break down into:
- 50% of after-tax income spent on your needs
- 30% spend on your wants
- 20% goes towards savings and debt reduction
50% – In your budget, find out how much you spend on needs every month starting from housing, groceries, daily utilities, and others. Whatever the expenses, these things shouldn’t exceed 50% of your pay after-tax deduction. Making things look less complicated and easy is the use of an emergency fund that can take care of your daily expenses and stop tracking them regularly.
30% – This is something that isn’t tough to decide because an unexpected want like buying a pair of warm clothing or a jacket for the winter season becomes a need, a change of tyre for your vehicle because it got punctured, a medical emergency, and so on. All these can never be repetitive and hence this will easily go under 50%. Clearly, 80% goes to your needs.
20% – Neither a need nor a want can go directly to your savings and clearing debts. If you can manage to divert and add funds to this 20% category then it just gives you a clear understanding and importance of being well-informed on your needs.
Now Or Never
The time is ideal to eliminate your wants and put your priorities in place. Take a walk in the morning or whenever you find time to do so and do away with gym memberships. Move to a place where the rent can be cut down.
Bottom Line
Savings are very frustrating initially but once you hit the rhythm it pays off for every single financial crisis that hits you. Your needs take a bigger chunk of the overall budgeting system and yet it is the key for mending your ways of spending and maintain the savings continuously for a longer period of time. If you are seriously thinking about keeping your wants at bay then the pandemic is a way to go.
Work today to gain tomorrow!
By Karthick V.
