Wants versus needs

So what’s the big deal with understanding wants and needs? Take a look at the Spending Calculator and the budget you created or printed out for your owner’s manual. Remember when you divided your expenses into fixed expenses and discretionary?  Your fixed expenses are your highest priority because they are expenses that you have already committed to spend each month or they may be expenses necessary for you to live comfortably. It is more difficult to cut back on your fixed expenses than your discretionary expenses.

Understanding your wants and needs is crucial because it allows you to make daily decisions about what you are committing yourself to financially and where it will fit in your budget. If you are someone that confuses wants and needs, chances are you will over-commit yourself to too many fixed expenses (like cell phone bills and credit card payments) that tend to drain your budget of any money to save and invest. If, from the beginning, you are able to correctly identify an expense as a “want,” you know that it is a discretionary expense and that this is an area in your budget that requires making plans, setting limits, and prioritizing ― or eliminating.

Spending versus income

Now, look at your budget again, and add up your discretionary/flexible expenses. How does it compare as a percentage of your monthly income? Can you find ways to decrease this amount? A healthy budget should set aside 10% to 15% of income each month for saving or investing. It’s a good idea to set savings aside first, and adjust your fixed expenses and your discretionary expenses so that you are able to achieve your savings and investing goals. An unhealthy budget will have too much spending in both fixed and discretionary expense categories. Overspending inevitably leads to credit card spending and debt, which will drive up fixed monthly expenses, leaving no money to save and very little to spend—even on discretionary expenses.  The bottom line is that if you can’t afford a discretionary purchase today, then you can’t afford that purchase at all!