How is it possible to cut back on expenses when you spend every rand you earn? The solution is possibly in understanding needs versus wants.
When you feel that there’s not enough money to get you to the end of the month, the advice you are most likely to get is that you should spend less on things you want to free up money for things you need. But what exactly is the difference?
In the simplest terms, “needs” are things absolutely necessary for your survival and wellbeing, whereas “wants” are things you would like to have but do not actually need.
In reality, however, the line between wants and needs can be blurry:
- Whether an expense is a need or a want often depends on how and why you use it. Home internet may be a need if you work from home, but if you use it only for entertainment, such as browsing social media or playing video games, it is actually a want.
- Parts of an expense may be a need while others are a want. A grocery bill is a need because you need to eat. But the chips and cold drinks in your trolley are definitely wants.
- The category of expense is a need, but the specific option you choose is a want. For example, you need a phone to communicate. But do you need the latest and greatest smartphone? Probably not.
Is saving a need or a want?
If your budget is tight, emergency savings, debt repayments and life insurance can feel like a want. While it is true that you don’t need these expenses to survive, you do need them for long-term financial and personal wellbeing. Having life insurance, for example, might not be something you need this month. But if you should pass away unexpectedly, your family will need the payout.
Tips to juggle wants and need
Now that we better understand the complexities of needs and wants, here are some tips to fit both into your budget.
1. Know your why
A big part of sticking to one’s budget is knowing why it is important. What will it mean for my finances if I do stick to a budget? What goals can my family achieve if I spend according to my plan? If you have a big, juicy goal in mind, you won’t allow spending on wants to derail you.
2. The 50/30/20 budgeting
Use the 50/30/20 rule to work out how much to spend on what: 50% goes towards necessities, 30% goes towards your wants and 20% toward financial goals like paying off debt or saving.
If your after-tax income is R15 000, this is what your budget will look like: Needs (50%): R7 500 will go towards accommodation, transport, food, etc. Wants (30%): R4 500 goes towards eating out, buying books, saving for holidays, etc Needs (20%): R3 000 goes towards paying off debt or saving for retirement
4. Write down your budget
You cannot say that you have a budget if you just make a mental note of your income and expenses. You must see the numbers and work with them for your budget to work for you. Little expenses easily fall through the cracks if you don’t write them down.
5. Shop with a list
Whether you do a big shop once a month or smaller shops once a week, the one thing that will stop you from buying wants, is a grocery list. Keep a running list of items that run out so that when you do go shopping, you don’t forget some things.
5. Spend your “wants” money with awareness
Once you have budgeted for your wants, you have to make sure you don’t overspend. For this, you can use the envelope method of budgeting. Draw your #funmoney allowance in cash, put it in an envelope somewhere safe, and each time you want to buy something for yourself, you take from the envelope. Once the money runs out, you know not to spend a cent more towards your luxuries. By assigning a concrete value to your wants, you prevent yourself from overspending and ending up in debt.