When creating a budget, people must learn how to separate a want from a need. Lots of people get confused about this. They think they need something, but they merely want it.
Once people learn how to separate wants from needs, they can create a successful budget. This can help them grow their savings accounts.
Determining Wants vs. Needs
Needs are items that people must have to live and work. These items aren’t a matter of comfort, they are required in life. These are items that include housing, transportation, food, and insurance. Utilities are also a need.
Wants are items that help people live more comfortably, but they are not required to live. People often fill their budgets with wants and convince themselves that they need them.
Common wants include travel, entertainment, designer clothing, and gym memberships. Fast food and coffee from Starbucks are also wants; although, there are plenty of people who would disagree!
Combination Items – Sifting Through the Noise
Things get difficult when wants and needs intersect. This is more common than consumers might think. Groceries are an excellent example of this. People need food to survive, so groceries are a need.
However, chips are not a need. They are a want. Sure, they are part of the grocery shopping experience, but no one needs chips to survive.
Then there is bread. It is easy to argue that bread is a need. It is a part of a basic food group. However, is organic honey-infused bread that costs $3 more per loaf a need? No, that is a want.
Look at all the items you buy and see if your wants and needs are intersecting. If they are, you can trim your budget a bit. Come up with a way to spend less on your needs to save money.
Budgeting for Wants and Needs
When people separate wants and needs they often try to cut their wants out entirely. However, wants and needs are both a part of the budgeting process, and you can afford both. Wants shouldn’t be left out completely, but they shouldn’t cause you to go over your budget either.
Start by writing down all the items in your budget and then separate the wants from the needs. Write down how much money is dedicated to each item and come up with an overall tally.
As a rule, 50 percent of your budget should be spent on needs and as much as 30 percent can go to wants. The remaining amount should go into paying off debt and savings. Of course people who have a lot of debt should take some extra money from the wants category and dedicate it to paying off the debt.
Dealing With Budget Shortfalls
Even after creating a budget based on wants and needs, some people still have budget shortfalls. They do not have enough money to cover everything. It’s important that these shortfalls are dealt with correctly. First, do not cut out any of your needs, it is possible to find other ways to trim the fat. For example, insurance is a need, but you might be able to find a more affordable option. Housing is also a need, but it is possible to spend less on a home.
Increasing your income might also be necessary. Those who cannot work within their budgets might need to look for another job. Sometimes making more money is the only solution.
Wants and needs are the foundations of creating a budget. Those who can identify them and budget accordingly get on the fast track to saving money. Start by looking at your wants and needs, and then create a budget for both.
This might be difficult at first, but as with all things related to finances, it gets easier over time.