If you want to create a realistic financial routine, you need a budget. Basically, a budget is a financial summary that compares and helps you track your incomes and expenses for a set period of time, typically one month. When we talk about budgeting, people often think we are talking about restrictive spending, but that is not the case, in fact, a budget allows for more freedom in how you are spending your cash.
With a budget, you will be able to consciously track your income, compare that income with your required expenses and your discretionary spending, thus a powerful tool towards helping you achieve your financial goals. A sound budget acts as a financial planning tool that helps you to plan ahead, discerning how much you need to spend and how much you need to save in a month. Even though making a budget is not the most exciting activity you will do, it is important for you to first understand why you are doing it and the advantages it has to push you closer to your financial goals.
One area that most people struggle with when creating a budget is differentiating between a ‘need’ and a ‘want.’ Many of the budgeting systems that you will come across will ask you to assign some percentages to what you need and what you want. If you look at the 50/30/20 budget system popularized by Elizabeth Warren recommends that you assign 50% of your income to needs and 30% of your income to wants.
What constitutes a “need” and a “want?”
This is extremely important before you actually start creating a budget, it is important that you understand what will fit into a ‘need’ and what fits into a ‘want.’ Putting items on your budget in these two categories will help you objectively evaluate your spending habits.
A need is something that you genuinely must-have for your survival such as food, clothing, and shelter. They are the essentials that you cannot go without for a significant period of time. They form the basics of everyday living.
On the other hand, a want is essentially something that will enhance your living. These are the things that you desire, but you can comfortably live without such as fashion items, restaurants meals, or entertainment. Basically, your aim should be to cut off ‘wants’ out of your life without significant disruption. These opposing sides to budget creation is a good starting point for anyone who is willing to create a realistic budget, especially when in a crisis mode. However, it is good to keep in mind that what may be a ‘want’ to one person, maybe a ‘need’ to another.
The Overlap between Wants and Needs
Something like mortgage payments, groceries, transport to and from work is‘ needs.’ Healthcare also falls in this category, but that will depend on the person as many young people skip healthcare or even replace it with a cheap insurance policy. However, when budgeting, it is important to keep in mind that there are a lot of gray areas when it comes to categorizing these two. For instance, while one will argue that food is a need, dinner at a fancy steakhouse will certainly fall under a ‘want’ category. And while you cannot certainly dispute transportation to and from work as a need, when you buy flashy sporty cars, then that will undoubtedly fall into the category of wants, especially when you already have a nice vehicle.
There are plenty of gray areas between needs and wants, in fact, a need may turn into a want if you overindulge. For example, just because you want a bigger house in a more upscale area, so you end up spending a lot on your rent or mortgage, the need for shelter shifts to becoming a want. Therefore, the ultimate decision rests upon you to decide what falls into which category.
Most people have been caught up in the trap of overspending on wants under the guise of filling the basic needs. If you give in to this pressure, you will be hurting yourself financially thus wasting your hard-earned money, and while it is okay to sometimes spoil yourself, doing that regularly will result in long-term financial issues.
Take a few minutes and think about your personal needs and wants. Estimate the monthly cost of each ‘want’ and ‘need.’ In other words, what is the total monthly cost of your ‘needs’ for example housing, food, and clothing? What is the total cost of your ‘wants’ or the items you may be making payments on that were purchased to satisfy your wants?’ are you spending as much for your ‘wants’ as for your ‘needs?’ try to identify ways to cut back on your ‘wants’ to help you save money.