July 5, 2022 | Article | 3 min Personal insights
Practices that reduce your spending and save you money
The foundation of successfully managing your finances is budgeting, and a pillar of budgeting is learning to distinguish your needs from your wants. If you can’t differentiate those, you could wind up overspending on luxuries that you can’t afford.
Give your budgeting skills a refresher by improving your ability to distinguish your wants from your needs.
Why Should You Budget For Your Wants?
If something makes you happy, why should you deny yourself that pleasure? Haven’t you earned that indulgence for working hard every day?
The problem with this mentality is that it can quickly develop into a habit that’s hard to break when you should be saving money for long-term expenses like a down payment on a house or repaying debt. Immediate, fleeting indulgences can rapidly consume your bank account and dictate your spending habits. Plus, many of these momentary desires can be discarded and forgotten quickly after you buy them.
If you want to successfully plan and achieve your long-term lifestyle goals, you need to identify and control your inessential expenditures.
Ways to Discern Wants From Needs
Courtney Jespersen of NerdWallet has a great technique to identify your essential needs: if removing a particular expenditure would directly impact your ability to live or work, that expense is probably a need. She identifies the most common needs to be housing, transportation, insurance (automotive, home and medical), home utilities and food.
Wants, on the other hand, are “expenses that help you live more comfortably,” according to Jespersen. You could cut these expenditures and still live and work as you currently do, just not as indulgently or gratifyingly as you used to.
The Gray Area Between Wants and Needs
Separating wants from needs isn’t necessarily a black-and-white matter. Oftentimes, expenses are on a sliding scale that make distinguishing them challenging.
For instance, a car is an important need for many people so they can commute to work and buy groceries, but the actual vehicle they choose and its amenities can become a want if a more extravagant model is desired. The same goes for other expenses, such as food. Sustenance is a need, but that prime rib isn’t.
Drawing a Line
As Paula Pant of The Balance points out, it’s hard for a person to see their own wants as anything other than a need, especially if you’ve grown accustomed to having that luxury on a daily basis. For instance, your streaming video subscription, morning coffee, makeup, internet service or even your smartphone (some companies do still offer pre-paid basic phones). It’s hard to think of your life without these amenities, but unless their removal directly hinders your ability to do your job or remain alive, you should budget for these expenses as non-essential.
If you’re struggling to figure out what expenses are non-essential, consult a friend whom you trust and consider prudent. Additionally, an outsider can bring an unbiased perspective to your spending habits that you can’t on your own.
A Good Budgeting Technique For Wants
Pant suggests following a 50/30/20 budget: 50% of post-tax monthly income goes to needs, 30% to wants and 20% to savings/debt reduction. She concedes that you shouldn’t cut every single want you desire, but limiting how much of them you buy every month forces you to prioritize which are more worthwhile to you. You’re prioritizing based on satisfaction, not just desire.
Being able to distinguish and prioritize your desires is essential to achieving your financial goals and reaching a lifestyle down the road in which you’ll have more disposable income to spend on your wants.