On Thursday we talked about figuring out how much you spend each month, which was the third topic in my Budgeting Basics series.
We also discussed categories a little bit, and today we’re going to delve even deeper into categories and figure out how much you spend on things classified as Needs, and how much you spend on things classified as Wants.
For this part of the budgeting project, I would grab a sheet of paper and draw a line down the middle. Write “Needs” on one side and “Wants” on the other, and then go through the categories of spending that you determined from Thursday’s post and put each one on the appropriate side of the line.
Here are some guidelines…
What is a “Need”?
A Need, in the budgeting sense, is any bill or expense you have to pay each month to take care of your basic needs. I’m talking Maslow’s hierarchy of needs, here: shelter, food, clothing, etc.
Basic Needs
Your rent or mortgage, utilities, and groceries would fall under this category of course.
I would also include insurance, both health and auto, as well as renter’s or homeowner’s insurance. The latter doesn’t cost very much per month ($10-$20 depending on your deductible and the amount of stuff you’re insuring), but it’s worth it’s weight in gold for the piece of mind it brings.
Things You Have To Pay
Also under Needs fall things like loans and credit card debt; things you have to pay each month or your credit score tanks and people come knocking on your door.
Student loans, credit cards, car loans, etc.
Not Quite Needs
Often, when budgeting, people will put their cell phone or internet down in the “Needs” column. You could argue either way on this front, but here’s what I think:
If you work from home, have a kid in school, or otherwise use your computer to supplement your income, internet connection is a definite need. Do you need a T-1 cable line? Probably not, but who am I to tell you you shouldn’t have it, since that’s what I pay for. (Who wants to use dial-up these days? Yuck.)
Similarly, if you don’t have a landline, and just have a cellphone, I would say that a cell phone then becomes a Need. Do you need a smartphone with a data package, though, probably not. If you really want to be anal about it, you could put the basic phone costs ($80 for talk and text, or whatever your basic plan is), and then put the data package you have to buy to use your shiny smart phone in Wants.
The except to this latter suggestion is if you are self-employed or an independent contractor (like a financial planner or a mortgage broker, or whatever) and you use your phone for email and internet for your job. Then I would say the phone is a Need, but it’s also a business expense, which means you could probably write it off. But that’s a topic for another post.
What is a “Want”?
A Want is anything that doesn’t fall under the heading of Needs or Savings.
Your daily cup of coffee at Starbucks is a Want. Yes, it is. I don’t care how addicted you are, you could just as easily (and much more cheaply) make coffee at home. ^_^
What Do You Spend Money On?
Now is the time to look back at the list of categories you made on Thursday and pick out the ones that remain above and beyond your Needs. Those are your wants.
Often Eating Out or Going Out will be a big one. Non-work clothes or shoes can be a big one for some. Books, video games, movies, other entertainment.
I put Netflix in our Wants, as well as all of our subscriptions (magazines, and online games). Personally, I would put Cable/Satellite (if I had it) in Wants, but I would put Internet in Needs.
Try to Limit Wants
I usually recommend to have only a few major categories of Wants. For one thing, you don’t really need all of the stuff you would accumulate if you spent more on Wants. For another thing, you’ll want to feel like you’re getting something for your money, instead of just spending it willy-nilly, especially if you’re just starting out and you don’t have a lot of money. The best way to feel like you’re getting the most for your money is to divide it between fewer things, so you have relatively more to spend in each category.
The best way to pick what to spend your Wants budget on is to think about what’s really important to you and choose to spend your money on that thing (or those things). Everything else, spend as little on as you can get away with.
That’s one of the primary tenets of frugality: spend more on what you love, and less (or none) on what you don’t.
So if you love cooking and using quality ingredients but any old coffee will do. Go ahead and shop at Whole Foods and buy organic, but make coffee at home and buy the cheap stuff. Don’t shell out for expensive coffee just because you feel you should.
What’s Next?
By now you should have a pretty solid list of Needs and Wants. Now all you have to do is figure out how much you spend in each category. If you’re not already tracking your spending, go back to Thursday’s post and get started. Once you have a good sense of your spending, add the numbers to your sheet of Needs and Wants.
If everything works out, you should have money left over at the end of the month. That’s where saving and investing comes in to play. Tune in next time for more details about that.
