Chapter 2: Budgeting Basics
First off, “needs” are the MVPs (Most Valuable Players) of your budget. They're the essentials, the must-haves that keep you ticking. Think food, shelter, prescriptions, basic clothing, and basic utilities.
Now, onto the “wants” – the cherry on top, the sprinkles on your sundae. Wants are the nice-to-haves, the extras that add a little sparkle to life. This includes things like that fancy coffee from your favourite café, your TV subscriptions, or dining out at your favourite restaurants.
But how do you tell the difference between needs and wants when crafting your budget? It's all about getting real with yourself. Ask yourself, "Do I really need this to survive, or is it something I want for a bit of extra pizzazz in my life?"
If you're required to wear trousers for work and your staple pair becomes stained, purchasing a new set might be deemed a need. However, buying a new pair impulsively while online shopping would likely fall under the category of a want.
While a luxurious gym membership may be viewed as a want for many, it could be deemed a necessity for a professional athlete. There’s no “correct” answer- it’s up to you to decide if something is critical for you to live your life or if it’s really more of a “nice to have”. Understanding the difference between needs and wants is like a superpower. It helps you prioritize your spending, ensuring that your hard-earned cash goes towards the stuff that truly matters.
Let's face it – By focusing on your needs and trimming the excess from your wants, you're able to save more, pay off debt faster, and build a solid financial foundation. It's like decluttering your financial closet – getting rid of the stuff you don't need so you can make room for what truly brings you joy. How do you know if you’re spending too much in your needs or wants category?
Option 1: The 50/30/20 method
A common budgeting guideline that people use to make sure they’re spending their money wisely is the 50/30/20 rule. This budgeting style recommends you spend up to 50% of your monthly income on needs, 30% on wants, and put at least 20% towards savings, investments, and debt repayment. This method is great for people who have fairly predictable expenses every month. Every payday, transfer 20% of your paycheck to your savings, investments, or to payoff debt, then set aside 50% to cover your needs (necessary bills and expenses), and the remaining 30% can then be spent on your wants (non-essentials).
Option 2: The 70/30 method
Another common budgeting guideline that allows for more flexibility than the classic budgeting rule is 70/30. This budgeting style suggests you spend up to 70% of your monthly income on needs and wants, and put at least 30% towards savings, investments, and debt repayment. This budgeting style is especially great for people who don't spend consistently in categories each month or for those who would prefer a simpler approach to budgeting. Every payday, transfer 30% of your paycheck to savings, investments, or debt-payoff, then you can spend the remaining 70% on wants and needs however you choose (make sure you cover all of your necessities first!).
Note: Feel free to adjust the percentages in either of these methods to fit your unique situation. Need to tackle some debt first? Shift things around to make your debt proportion higher. Saving for a dream vacation? Adjust accordingly. It’s your budget, so you make the rules! Your split between needs and wants might also shift depending on your cost of living, such as renting in a more expensive city or paying for childcare. Remember, budgeting isn't about restriction; it's about balance and making sure you’re carefully choosing where your money goes to help build a better future.
-
Add a short summary or a list of helpful resources here.