Let’s face it. We’ve all gone shopping at some point or other, spotted something we really liked and said to ourselves ‘I really need that’. But in reality, if you were to challenge yourself, you might find that you don’t in fact need it, it’s just that you really want it.
The key to managing a budget well and sticking to financial goals, is knowing the difference between what you actually need and the things you want.
What is the difference?
Needs are those items that are essential in our day-to-day life. Things we can’t do without. Think of a roof over your head, sufficient food to eat and clothing. For the most part, these are usually recurring expenses that you pay regularly.
Examples of needs include:
- Food
- Water
- Shelter
- Clothing
- Safety
Wants are those nice to have items that you don’t necessarily need to survive, but make your life more comfortable and fun. They may not be something you pay for on a regular basis and are often considered to be luxury buys. Nice to haves.
Examples of wants include:
- Travel
- Entertainment
- Video games
- Designer clothing
- Junk food
- Fancy high end gadgets
How can I get the balance right?
No matter how much money you have or where you get it from i.e. your job, pocket money or birthday and Christmas money, you need to know how to manage it effectively, so that you can make the most of it. That’s where the 50:30:20 Rule comes in handy. It helps brings balance to how you budget and manage your money. Using this simple, yet valuable rule, can be so effective as you learn to split your money between your needs, wants and savings, and create a positive habit for life.
The 50 30 20 rule
Here’s how it works.
When you save with a purpose, like wanting the latest mobile phone, tickets for a festival or even that cool school trip to Italy, you are far more likely to stay motivated and on track. At least 20% of your income should go into savings. Putting even more in, means you’ll reach your goal faster. When your goal is saving, ‘wants’ can be difficult to resist. It’s important not to give in to these impulses, driving you to spend unnecessarily. ‘Wants’ can snowball from small things into bigger things. Before you know it, your savings goals and financial future plans are impacted and you’re back to square one. If you live by the 50:30:20 Rule, 30% of the money you get should go towards wants.
‘Needs’ we can’t do without. Whatever your need, according to the 50:30:20 rule, 50% of your income should go towards your needs. When spending on things you need e.g. a new laptop or iPad for school, be money smart. Do your research, compare prices and shop around for the best deals before you spend your money. That way you’ve more to put towards your savings or wants.
Final thought
Spending money is easy, we all know that. And with access to the internet, we no longer need to even leave our homes to shop, making it much easier to spend on our wants. The next time you make a purchase or even think about buying something, ask yourself ‘Is this an item I truly need or is it just something I want because all my friends have it?’ Being confident in your purchasing choices and knowing the difference between needs and wants is key and will ensure you remain money smart!
And remember! We are all guilty of veering off our savings goal trail at times, or have had to tackle an unexpected cost. The main thing is to get right back on track as soon as you can and stick to your financial goals.
‘Teach yourself to be impatient for your needs and teach yourself to be patient for your wants.’
P.S. Jagadeesh Kumar
