Personal budget planning offers many benefits like reducing your debt, building up savings, and keeping out of financial trouble. The budgeting process for some people might be tricky things to face. One of the things that people often get caught up in is correctly identifying their needs vs. their wants. If that’s you, we’ve got budgeting advice here to help differentiate the two.
Preparing a Budget
First, let’s make sure we cover the basics. You should create a budget with a budgeting purpose in mind. This thing is the ultimate end goal of why you are undergoing this personal budget planning in the first place. When preparing a budget, this should be the first thing you do. Examples of a budgeting purpose include:
- Save money for a down payment on a home
- Pay off all my credit card debt
- Save for my child’s education
- Have money set aside for emergencies
- Reduce the monthly expense by 1/5
Income Management on Budgeting Process
Your income and expenses are the two most important factors in determining your budget. During the budgeting process, you will identify the sources and amount of income you and your family bring each month. It is especially important if you have income from various sources that fluctuate. The best budgeting advice in these cases is to estimate the amount conservatively. It will provide better income management in your budget, where you are more likely to have more money left over rather than a negative amount.
Determining Your Required Monthly Expense
After identifying your income, the next critical step in a budget is reviewing your necessary monthly expenses. Some needs must come first. A need is something that you genuinely must have because they are essential. You can’t go without a need for a significant amount of time. The basics of daily living, such as food, shelter, and transportation, are all part of this category.
Your List of Needs
It’s helpful to create a needs and wants list to help differentiate the two. Here are some required monthly expenses, otherwise known as everyday needs:
- Home mortgage or rent
- Water, sewer, and trash pickup
- Basic phone service
- Health Insurance
- Life Insurance
- Disability Insurance
- Homeowners or renter’s insurance
- Healthcare/medical/dental care
- Prescription drugs
- Child care
- Groceries (only the essentials)
- Personal items like soap, toothbrush, deodorant
- Household items like toilet paper, laundry detergent
- Car loan or lease payments
- Car maintenance
- Tolls, parking, public transportation
- Property taxes
- Alimony or child support
- Required debt payments like school, personal, and other loans
- Credit card payments
Clothing or clothing maintenance could also be a need. You need to ask yourself if buying new clothes is necessary for your work or other factors (i.e., being pregnant) that it is indeed a need. You might have noticed there’s no mention of the internet in this list either. That’s because unless you work from home or have children who rely on it for their education, the internet is generally nice to have or want.
Identifying Your Wants
It’s definitely the latter that is more fun to think about on your needs and wants list. It’s also more likely to put you in financial trouble when they aren’t appropriately managed. Wants are going to be expenditures like Netflix, eating out, buying designer clothes, and traveling. If it comes down to it, you could live without your wants.
There is a Grey Area between Needs and Wants
Everything isn’t exactly black and white when it comes to needs versus wants. For example, earlier, we identified “groceries” as a need. However, cookies, chips, organic milk, and expensive cuts of meat aren’t’ needs. Bread, eggs, milk, vegetables, and fruits are. So actually, preparing a budget for the grocery is a combination of the two.
How to Get What You Want
If your budget doesn’t have enough wiggle room to provide for something that you want, consider some of these tweaks:
- Look for ways to lower the cost of your needs. For housing, consider a roommate or moving to a cheaper place. Find more affordable child care or pay off your debt faster, so you have more available money.
- Take up a second job. Side hustles are ever so popular in today’s world. Find a job on the weekends, do ridesharing, deliver groceries, or use your specialized skills to help business owners.
- Compromise your wants. If you want to take a vacation, consider going on one that is less expensive. If you like eating out, reduce it down to fewer days a week.