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304 North Cardinal St.
Dorchester Center, MA 02124
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Understanding the difference between wants and needs in your budget is crucial for maintaining financial health. At O1ne Mortgage, we believe in empowering our clients with the knowledge to make informed financial decisions. In this article, we’ll explore how to identify your wants and needs, budget for them, and create a balanced financial plan. For any mortgage service needs, call us at 213-732-3074.
It’s easy to confuse wants for needs in your budget. You may feel like you need a top-of-the-line brand new car to replace your old one, but a less expensive used model might fit better into your budget. Understanding how to identify each type of expense can help you make more informed decisions about your spending and avoid overspending.
In a budget, wants are expenses that aren’t essential for basic living. They’re the things you desire for your lifestyle or for enjoyment. Wants include things like:
If you’re trying to figure out whether an expense counts as a need, ask yourself a few questions:
Needs are expenses that are essential to your survival. They include basic things you need to live, expenses required for doing your job, and resources to build and protect your assets. Needs include things like:
Needs are expenses that you can’t skip without jeopardizing your health or well-being. Be careful about confusing wants for needs, however: You need food, but dining out every night is a desire, not an essential expense.
If you’ve ever created a budget, you’re familiar with the basic steps of building a budget:
This simple budget doesn’t highlight the differences between your wants and needs. When you’re building your budget, it can be helpful to take a different approach for each category of spending.
Since your needs are essential to your survival, they take priority in your budget. It’s important to make sure your needs are covered before allocating money to your wants. Otherwise, if you under budget for your needs, you could miss payments on essential spending. Missed payments can lead to serious consequences such as having your utilities disconnected or risking foreclosure.
List your monthly needs and the amount for each. You’ll find that some of your needs have a fixed cost each month, like your rent or mortgage payment. Others, like gas or the electricity bill, may vary from month to month. For these variable expenses, you can budget based on an average amount or set a target spending amount. Add up your needs and make sure the amount doesn’t exceed your income.
If you’re struggling to afford your basic needs, review your budget to find areas where you can reduce spending. For instance, can you carpool to spend less on gas? Can you use less electricity to lower your electric bill? If cutting back isn’t an option, you may have to find an additional income source or look for assistance programs that can help you afford these essentials.
Make a list of your wants, including the amounts. After you’ve budgeted for your needs, you can start assigning the remaining income to your wants.
You may have to balance your wants with your financial goals. For instance, if you want to build an emergency fund or pay off your credit cards, you may have to cut back on your wants. You don’t have to completely sacrifice spending on your wants to meet your goals, however. Striking a balance between the two is healthier and easier to maintain over a longer period of time.
Financial health doesn’t mean strictly spending on your needs or splurging on your wants. It’s possible to cover your wants (at least some of them) while keeping up with your needs. There are several approaches to budgeting that allow you to balance your wants and needs.
The 50/30/20 budgeting method allocates 50% of your monthly income toward needs, 30% toward wants, and 20% toward savings and debt repayment. Many people find this the easiest method to stick with, as it allows for more flexibility within the main categories.
An envelope budget isn’t so much a method of budgeting as it is a method for sticking to your spending plan. After you determine what you’re spending on each budget category, place that amount of cash in a labeled envelope to guide your spending. This method relies on the use of cash instead of credit cards, so you may miss out on points or cash back from using credit cards, and you’ll have to carry actual paper money around with you.
Alternatively, you can use a budgeting app such as Goodbudget that virtually accounts for the amounts in each envelope and removes the need to use only cash.
Rather than saving the money you have leftover after paying your monthly bills, the reverse budget prioritizes savings by allocating for it first. Then, you split the remaining budget between your needs and wants. This method is especially helpful if one of your main financial goals is building up your savings.
Every dollar of your income is assigned to a budget category with zero-based budgeting. In the end, your planned spending should exactly equal your income once all your debt repayments, budgeted wants and needs, and deposits into savings are accounted for.
While your wants can easily feel like needs, it’s important to be able to differentiate between the two so you can make the best spending choices. It’s OK to spend on wants, as long as your budget allows. However, there may be times that you need to reduce spending on your wants to focus on other financial goals.
There are several budgeting methods you can use to balance your wants and needs. You may enjoy the convenience of a budgeting app, since you can access it from anywhere to plan and manage your spending, or an accountability app that helps keep you on track with your spending.
For expert mortgage services and personalized financial advice, contact O1ne Mortgage at 213-732-3074. We’re here to help you achieve your financial goals and secure your dream home.
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