Some things you need — a roof over your head, electricity in your home, gas in your car to get to work — and some things you just want, like tickets to a show or dinner and a movie. You can fit both into your budget and still set money aside for emergencies if you manage your spending with care.
Keep reading to learn how to balance financial needs and wants.
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Financial needs are expenditures that are essential for you to be able to live and work. They’re the recurring expenses that are likely to eat up a large chunk of your paycheck — think mortgage payment, rent or car insurance.
Here’s a short list of some common expenses that fall under needs:
Wants are expenses that help you live more comfortably. They’re the things you buy for fun or leisure. You could live without them, but you enjoy your life more when you have them. For instance, food is a need, but daily lunches out are likely more of a want.
Wants typically include things such as:
Travel.
Entertainment.
Designer clothing.
Gym memberships.
Coffeehouse drinks.
Wants and needs won’t be the same for everyone. You may need a car to get to and from work each day, for example, but the type of car you need can vary. If your job requires driving around high-powered clients, for example, a luxury car may be a need. If you're simply shuttling yourself to and from the office, it's likely a want and a more affordable car will suffice.
The same is true for smaller-ticket items, like that new coat you're eyeing. Outerwear is definitely essential to protect you from the elements, but if you have three other coats in your closet, that jacket is probably a want.
So how do you start accounting for wants and needs in your budget? Begin by writing a list of all the things you buy. That means everything from toilet paper to life insurance. Then, group purchases into broad categories like toiletries, cable, phone and insurance.
Divide the categories into two buckets: wants and needs. We would place insurance and a basic phone plan under needs, but a Netflix subscription and deluxe cable package will more than likely fall under wants.
Tally the totals and align your priorities. At NerdWallet, we recommend the 50/30/20 budget. If you distribute your monthly income in this fashion, you would spend 50% on needs, 30% on wants and 20% on savings and paying off debt. Plug your monthly take-home income into this budget calculator to determine how much you have available for each category.
If your current spending is disproportionate based on the list you made, there’s good news: You can make adjustments. Here’s a simple way to start:
Move things around. Take a close look at your categories. Some of the items you’ve indicated as needs may actually be wants, or vice versa.
Trim spending on needs. The cost of your necessary spending isn’t always fixed. Shop around for a better rate on your phone plan, cable package or even your insurance to save money on your needs. Shopping around for car insurance could save you more than $400 per year, according to a NerdWallet analysis.
Trim spending on wants. Consider downsizing your wants if they’re taking over your budget. Limit how many days you dine out, for example, or opt for more affordable lodging the next time you travel.
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Try the 50/30/20 rule as a simple budgeting framework. Allow up to 50% of your income for needs, including debt minimums.Leave 30% of your income for wants.Commit 20% of your income to savings and debt repayment beyond minimums.
The 50/30/20 budgeting method allocates 50% of your monthly income toward needs, 30% toward wants and 20% toward savings and debt repayment. Many people find this the easiest method to stick with, as it allows for more flexibility within the main categories.
The 70-20-10 budget formula divides your after-tax income into three buckets: 70% for living expenses, 20% for savings and debt, and 10% for additional savings and donations. By allocating your available income into these three distinct categories, you can better manage your money on a daily basis.
Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Needs include food, housing, healthcare, and transportation—in other words, anything you really can't do without and maintain your health and security. Wants include items like entertainment, travel, designer clothing, and so on. If you can trim it from your budget, it's probably a want vs.a need.
Put 60% of your income towards your needs (including debts), 20% towards your wants, and 20% towards your savings. Once you've been able to pay down your debt, consider revising your budget to put that extra 10% towards savings.
The 40/40/20 rule comes in during the saving phase of his wealth creation formula. Cardone says that from your gross income, 40% should be set aside for taxes, 40% should be saved, and you should live off of the remaining 20%.
60/40. Allocate 60% of your income for fixed expenses like your rent or mortgage and 40% for variable expenses like groceries, entertainment and travel. 30/30/40.
Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process begins from a “zero base” and every function within an organization is analyzed for its needs and costs.
The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
Personal finance expert Dave Ramsey says if you're going through a tough financial period, you should budget for the “Four Walls” first above anything else. In a series of tweets, Ramsey suggested budgeting for food, utilities, shelter and transportation — in that specific order.
If you aren't sure if an item is a need or a want, do without it for a period of time. If after that time you truly can't live without it, it may be a need. However, even the essentials like shelter or transportation involve a want vs. need calculation.
A want is something that can improve your quality of life. Using these criteria, a need includes food, clothing, shelter and medical care, while wants include everything else.
List down all the “needs” first and make sure your income can cover them. The remaining money can be used for some “wants,” but don't let yourself fall into the trap of impulse purchases. Before you spend on any “wants,” just ensure that you've covered your priorities first.
List out your wants and needs. When budgeting, start by listing your needs and including the basics, like food, rent, or mortgage, as well as other fixed expenses necessary for you to live your life. Those things may include transportation costs, insurance, and clothing or tools you need for work.
For some expenses – like rent or a mortgage payment – it's clear that it's a need. Shelter is a basic necessity and cannot go unpaid. On the opposite end of the spectrum, retail therapy is clearly a want.
Making lists is a really great method of doing this. Present, short-term, and long-term wants and needs should be added to the list. Also, add what you are sure you do not want. This method will help you get clear about what you do and do not want out of your job, relationships, and life in general.
The 50/30/20 rule is an easy budgeting method that can help you to manage your money effectively, simply and sustainably. The basic rule of thumb is to divide your monthly after-tax income into three spending categories: 50% for needs, 30% for wants and 20% for savings or paying off debt.
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