If part of your goals for this year entails getting in the best financial shape of your life, then you have likely started to think about a budget. One of the most popular budget strategies is the 50/30/20 rule.
The goal of the 50/30/20 rule is to spend 50% of your budget on needs, 30% on wants and put 20% toward savings. But for some, differentiating between needs and wants can be challenging. It can also be difficult when your needs and wants do not align with everyone else’s. Needs may vary not only by geographical region and family size but also because of several other factors.
The most important thing is setting realistic expectations for yourself and giving yourself some wriggle room. Here are a few tips for defining needs vs. wants so that you can get your budget in shape.
What Are Needs?
Needs are typically considered your daily living expenses. Ideally, you’d spend approximately half of your budget on these necessities each month. What gets tricky is when you have needs that are atypical or more costly than the average person such as medical expenses related to an unexpected illness or injury.
Needs often include but are not limited to:
- Rent or mortgage payments
- Health insurance costs
- Transportation expenses (car payment, insurance, gas, etc.)
- Groceries and food bills
- Home or renter’s insurance
- Job-related costs
- Child care expenses
Additional need expenses that may not apply to everyone are legal costs (child support, past due taxes, spousal support) and school-related costs. In some cases, paying for these additional expenses may cause you to exceed your 50% needs budget. The 50/30/20 rule is not a hardline. It is designed to be a guiding post.
If you are unable to meet your obligations on your current income, it might be worth meeting with a financial professional.
What Are Wants?
Wants encompass everything else that you spend money on. It is considered discretionary spending or costs that are not required to meet your basic needs.
Typical wants usually include:
- Entertainment (concerts, amusement parks, recreational activities)
- Cable TV and streaming services
- Dining out
- Travel expenses
- Most clothing (although a simple wardrobe is generally considered a necessity)
- Gym memberships
- Subscriptions such as gaming apps, magazines and services
It is important to remember that a successful budget generally does not require you to completely cut out all of the things that make you happy. Your budget should allow you to still spend money on things that you enjoy just within moderation.
What Is Not Considered a Want or a Need?
In addition to wants and needs, the 50/30/20 rule calls for putting 20% toward savings. However, many people carry significant amounts of debt. Many financial experts recommend using the 20% savings portion to pay down your debt before applying it toward a rainy day or retirement fund.
How Can I Decrease My Want Spending?
One of the hardest things for people to do is decrease their “want” spending. However, there are several tips and tricks for reducing your discretionary spending.
First, you need to write down your income and expenses. Seeing how much you spend may help you cut back. Many people do not realize how much they spend each month on non-necessities. Subscription services that are directly deducted from your credit card or checking account are a common culprit of unnecessary spending that is easily forgotten.
Next, you can develop a reward system. Set spending goals with incentives when you achieve them. Many people are reward-driven. Say your goal is to spend less on eating out, you may decide to treat yourself to a dinner out after eating at home for the week.
Finally, you can decide to leave your credit cards at home if you are going out to the mall or a retail store. Removing temptation can help you stay on track and on budget.
Final Budget Considerations
As you begin to define your needs vs. wants, just remember there is no one-size-fits-all budget. Your needs may look slightly different than your friends and family. Allowing yourself the ability to spend money on the stuff you love may actually help you stick to your budget in the long run.
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