When planning a monthly budget, it is more important to make a clear distinction between financial needs and wants. Then define how much you should set aside for both to get the most out of your income.
It can get tricky as each person’s needs and wants are different. Also, sometimes people mix up the two.
Luckily, it’s never too late to learn how to manage personal finance. Therefore, in this article, we will cover:
- Needs vs wants: What are the difference and examples?
- How to budget for needs and wants?
- In which category should you put the savings?
- The best way to achieve all of your financial goals.
Let’s get started!
Needs vs Wants: What is the difference
It’s crucial to know what expenses are because it will allow you to know exactly how much money you need and your priorities.
Identifying Needs
Needs are basic, mandatory, or fixed living expenses that everyone needs. It includes:
- Food
- Health care and medication
- Housing
- Utilities
- Transportation.
Housing can include mortgage, rent, taxes, insurance, and homeowners association fees (HOA dues). Standard utilities in the USA today include water, sewer, electric, gas, trash, and recycling.
This category is straightforward to understand because we all need a roof over our heads, food to eat, and transportation to work. We wanted to highlight these necessary expenses to be easier for you to understand what that means.
Determining Wants
Besides things that are necessary to survive, there are some things that you just want – like a new pair of shoes, a trip to Europe, or a concert ticket.
What you will consider as wants depends on your lifestyle, monthly income, age, and hobbies and is usually very different from person to person. It’s impossible to make a final list of things in this category, but here are some examples:
- Education
- Health insurance
- Entertainment
- Travel
- Monthly subscriptions or memberships
- New clothing
- Dining out
- Mobile phone, internet, cable TV
So, you got an idea. Wants are the things we don’t need to survive but enjoy them. The key to taking control of your finances isn’t to cut off cost that is not essential but to balance them.
You need to truly understand your monthly cash budget, how much you can spend on something, and what is crucial and what isn’t.
After making your own list of necessary expenses and setting aside cash for other financial needs (like retirement), it will be easier to understand how much spending money you have for wants. Often people realize that the main reason why they struggle with budgeting is that they are spending too much on wants.
”Needs” That are Actually Wants
Putting an expense in one section is related to our way of living. For example, for someone with a remote job, the home internet is a need.
On the other hand, it is a want for someone who uses the internet for entertainment, like watching TV shows and scrolling on social media.
Clothing can be seen as a need – we cannot go naked around, but also as a want – designer clothing isn’t something that we cannot live without. But still, for people that are fashion influencers, clothing might come as a need.
You see how it depends on the individual situation.
There are also differences when it comes to needs. Even though food is essential, it’s important to acknowledge that not all food is the same – chips and chocolate ice cream are more of a want.
This mindset of understanding and thinking about spending will help you create a household budget more efficiently. If you are tight on a budget, this can be your way to reduce unnecessary costs and focus on savings.
If you are happy with your income, you still can learn how not to waste your money because it can be used more beneficially, for example, to invest.
Needs vs. Wants: How To Budget For Both?
Yes, it is possible to budget your needs properly and wants on a monthly basis even though you don’t have a limitless amount of income. One of the most popular ways to budget, and something we did, is the 50/30/20 rule.
The 50/30/20 Rule of Thumb
The basic idea of the 50/30/20 rule is to allocate your monthly budget into three main categories: wants, needs, and savings. That way, you will know exactly how much cash you have and can spend on certain things.
We made a quick checklist for you to be easier to start budgeting for needs and wants.
Calculate Monthly Income
First, you need to determine your monthly after-tax earnings. You need to know how much cash you have and how to separate your budget.
Consider Your Spendings
The next step is to analyze your spending habits. You might look at the card’s report over the last months and see how much you spend on what and whether it is necessary.
If you are spending too much on unnecessary things, try asking yourself whether you need that, want that for a more extended period, and how often you find that it’s something you’re missing. That way, you will reduce the purchases that don’t make sense.
Determine Your Expenses
The third step is calculating your spending and deciding how much money goes to every category. So, 50% of your after-tax earnings goes to basic needs, 30% to wants, and 20% to savings.
If you can’t afford everything from your wants list immediately, make a list of priorities. Some things can wait until you don’t have a problem affording them.
Identify Goals
The next step is to set your payoff debts and savings goals. We saw in practice how people must have clear goals.
Keep Tracking Your Spending
In addition, the last (but probably the most challenging step) is to keep tracking your spending and stay within the budget frame. It’s easy to go back to old habits, so some people find it helpful to use free tools for their budget, like Personal Capital.
Side note: You can change each category’s percentage depending on your earnings and goals. For example, someone who wants to save money might divide their cash as 40/30/30 or even 30/30/40. Of course, this relies upon many factors like how much their needs are.
We think the 50/30/20 budgeting rule is an excellent way to start with. This budgeting method is customizable, so you can follow whatever your earnings are.
Savings: Need or Want?
Our strong belief, and let’s call it financial philosophy, is that savings are the need. Let us elaborate!
You technically don’t need to set aside cash for funds like retirement, debt payment, life insurance, emergency fund, etc., every month. Since it is not an immediate need, many people feel like it is a want. You certainly can live without putting that money away.
Still, because savings and paying off your debt are long-term financial goals, they are crucial for your future well-being, and that’s why they are considered needs.
The money-saving technique focusing on savings is called ”pay yourself first”. It means that you are ”paying” your savings and investments accounts first. That way, you are saving for long-term needs and expenses. It involves:
- Buying life insurance, like a whole life insurance policy
- Putting money into retirement accounts
- Saving for an emergency fund
- Paying off mortgage or other debt
- Car insurance.
By paying yourself first, you are making long-term goals a priority. This approach works because it increases the likelihood of saving a certain amount and converting it from a wish into a necessity.
Own Your Lifestyle – The Infinite Banking Concept
Let’s combine everything we discussed and allow us to represent the strategy we think is the best – the Infinite Banking Concept.
The Infinite Banking Concept, also called overfunded life insurance, is a financial strategy that takes advantage of overfunding a whole life insurance policy by using the cash accumulation to grow and build wealth.
So, you first need a whole life insurance policy which is an extraordinary way to simultaneously have a long-life insurance and investment tool to start your Infinite Banking process.
The Infinite Banking Concept uses the whole life policy to contribute extra money to the policy to boost the policy’s cash value immediately.
This money grows tax-free in the policy’s cash account and can be accessed via policy loans or cash withdrawals. That cash can be used for needs and wants or however you wish.
The most significant advantage of over-funded life insurance is absolute liquidity or cash flow improvement. A whole life policy’s value is far more liquid than other financial products (like equity in real estate) because the loan can be taken out more quickly.
The individual can secure cash in hand faster and with no additional fees or interest rates than those from traditional banks.
It’s the reason why this strategy is also referred to as ”becoming your own bank”. You are becoming your own bank by making loans from your policy and paying it back! But, in your bank, there is no place for fees and high interest like in traditional banks.
The Infinite Banking Concept is the safest and most efficient investing method.
Here is how to set up Infinite Banking:
- Ideally, start young-ish.
- Choose a reputable insurer.
- Buy a whole life policy.
- Add a paid-up addition rider.
- Borrow money against your policy and pay yourself back.
Final Thoughts
After reading this article, we hope it is easier for you to make a list of needs and wants and how you can budget for them. It is good to save money, but it isn’t a way to make all of your dreams come true.
You will need a more powerful weapon for bigger goals, like building wealth and achieving financial freedom. And that weapon is the Infinite Banking Concept.
You are wondering how to use your policy to build wealth? Watch our free masterclass, and you will learn how to own your lifestyle in just an hour!