When chalking out a monthly or quarterly budget, it’s important to consider what you spend your money on. Financial planning begins with how you spend your money “wisely” and for a healthy financial life or to achieve financial dreams, it’s important to strike a balance between your “wants” and “needs”. But what are these wants and needs? Is everyone’s perception of wants and needs the same? Does it vary from person to person?
Define needs & wants
All your expenses and spending activities happen broadly under two categories – your needs and your wants.
Your needs are something which you can’t do away with. These are essential things that you cannot go any significant period of time without. Can you skip paying your monthly utility bills or skip “grocery shopping” or not spend on “fuel” and “transportation”. Certainly not! These are the things you have to take care first and only then comes other things which you can do without.
Whereas your wants are “non-essentials” which you wish to have but they are not above your needs. A want is essentially something that enhances your life and that you’d like to have, but that you can easily get away without having. Buying that latest phone in the market, splurging on shopping, having a car – you can certainly live without spending on these!
Now, wants and needs vary from person to person. Some people’s Wants can be a Need for others and vice versa. For example, a professional who has a car and used it for many years may think of upgrading it into a better model. Conversely, someone who admires a certain car model and would like to buy as a first-ever car purchase, such spending would be a want. It all depends on your lifestyle. And many a time it depends on your financial capabilities. When you accumulate a lot of money, you may buy things that you want apart from the things that are needed on a daily basis.
What goes in the needs bucket and wants a bucket
Before you start building a budget, it’s crucial to understand what really fits into each of these categories, and objectively evaluate your spending habits.
Your rent or home loan EMI payment is absolutely a need. Your basic groceries, transportation to and from work, clothing, and utilities like water, electricity, food fuel, etc. have to be taken care of every month. Healthcare and insurance are also important needs. A household runs on these basics and 50% (approx) of your earnings goes in taking care of all this.
However, make sure your needs and wants don’t overlap. Here’s how:
- While food certainly qualifies as a need, a fancy Saturday dinner is considered splurging and fall
into the “want” column.
- Grocery shopping is a must but buying more expensive brands at the grocery store, or buying multiple utensils with same function goes into wants category.
- Clothes, too, are a need, but they can quickly fall into the want category if you’re splurging on expensive brands or buying outfits you’re only going to wear a couple of times.
- If you’re spending far too much on rent or EMI on home loan in order to live in a larger home or better housing society may also be considered as a “want”.
Clearly there are plenty of thin lines between needs and wants. Ultimately, it’s up to you to decide what falls into which category. The whole motive and intention should be to avoid falling into the trap of overspending on wants under the disguise of filling basic needs. If you cross the line, you will end up spoiling your financial health. Although it’s fine to occasionally spoil yourself, but making it a habit could result in long-term financial issues.
How to Balance between Wants and Needs?
By following the 50-30-20 rule, you can simplify your budget. It gets easier that way. Which means 50% of your budget/spends should go towards your needs and 30% of your budget/spends should go towards your wants. The remaining 20% should not be spent at all and should directly go for your savings. The trick is to strike a balance in these limits and automatically your financial balance will fall into place.
Also, it might seem that minimizing your spending on wants is the foremost rule. But in reality, the objective is to reach a healthier balance within your spending habits. Just because you classify an expense as a want doesn’t mean that you shouldn’t be spending money on it. As long as you’re properly managing your budget, you can meet your needs while still enjoying your wants and uplifting your lifestyle.
Eat out certain on certain weekends, go on vacation but budgeted one, go on shopping but not occasion based – chalk out your wants and they won’t look like a burden. If you find that you aren’t allocating your budget in a healthy way, move things around. The aim should be to spend/save money for your needs and then take care of your wants. Once you prioritize all your expenses/goals in these categories, planning your finances becomes easy!
First things first – properly classify your needs and wants according to your financial health and monthly earnings. Secondly don’t overspend on your wants (remember they are luxury). Thirdly regularly review your spending and properly allocate money for needs and wants in a budget-healthy way. And lastly, to better handle your financial health you may need a financial doctor aka a financial advisor who can help you build a financial plan.
When budgeting, a financial advisor optimizes your financial plans to make sure you’re still on track for long-term goals like owning a house or retirement. Finding the right financial advisor that fits your needs doesn’t have to be hard. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started with one. In case you need a professional touch, feel free to write to us.