Even though we are in the business of helping people with their financial needs, we strive to educate our members on the best approach to borrowing and saving. The secret to managing your day-to-day lifestyle and planning for a solid financial future is balancing needs with wants.
Needs vs. Wants
Needs are easier to identify because these are the basics you need for survival. Here’s a short list of common expenses that fall under needs:
- Food and water
- Gas and electricity
Wants are expenses that help you live more comfortably. These include things you buy for fun or leisure. You could live with or without them but you enjoy life more when you have them. Wants typically include things such as:
- Designer clothes
- Gym memberships
- Fancy coffee drinks
For example, you need a car to get to and from work every day but a $750 luxury car payment may not be realistic for your monthly budget.
Prioritizing Needs and Wants
So how do you prioritize your needs and wants in your budget?
- Start by compiling a list of everything you buy. That includes everything from a cup of coffee at the local coffee shop to your monthly mortgage or rent payment.
- Put these items into two broad categories – Needs and Wants. For example, groceries are a need but eating out would be a want.
- If the wants outweigh the needs, it may be time to re-evaluate and make changes. For example, even if you have a legitimate need, is there a way to trim that cost? Wants don’t have to completely disappear but is there a way to downsize them? Tough but important questions to ask and answer.
Are You Saving Enough?
Most financial experts recommend using the 50/30/20 rule for budgeting.
- 50% of your budget goes toward essentials (needs)
- 30% of your budget goes toward discretionary spending (wants)
- 20% goes toward saving for the future
Let’s say you’ve calculated your after-tax income as $3,700 per month. In this case, you’d have $1,850 for needs, $1,110 for wants, and $740 for savings. We actually recommend you view the 20% savings as a need rather than putting it at the bottom of your list.
Of course, everyone’s situation is different and saving 20% may not be feasible for you. But remember, saving something is better than saving nothing. Your savings is money you set aside for your future, for an emergency, and for your retirement. This can also be used to help you pay off any debt faster than required.
At Members Trust, we’re here to help you plan for a strong financial future. We have a variety of quality savings options available, to help build your nest egg.