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(From Financial Literacy Blog) – Wants are things someone would like to have but can live without. Needs are things someone must have to survive, such as food, water, or shelter. When learning the differences between the two, people are often told the key to budgeting is simply spending money on needs instead of wants. While needs are more important and should be prioritized, it’s okay to spend money on wants––as long as one’s necessities, savings, and debt repayment plans aren’t impacted. By following the popular 50/30/20 model, people can budget for both wants and needs!
First, what is a budget? It’s a plan that outlines where each dollar someone has will go. However, if a budget is too complicated or overwhelming to follow, people may decide to stop referencing it. The 50/30/20 budget model is a simplified budgeting method that is easy to follow and stay committed to. In addition to being easy to follow, it’s an effective financial strategy. People following the 50/30/20 model divide their take-home income into three categories: 50% for needs, 30% for wants, and 20% for savings and debt repayment.
People should begin by determining what their take-home income is each month. This is what they earn for income after the deductions of taxes, benefits, or contributions from a paycheck. Next, they should write a list of all the things they pay for each month. That means everything from hand soap to health insurance. After all the expenses have been listed, people have to decide whether each expense is a want or a need. Most expenditures may be obvious and easy to categorize, but others may be more difficult. For example, water is a need. However, seltzer water is a want. As another example, someone commuting from outside the city would categorize a vehicle as a need. For someone living in the city with access to public transportation, a vehicle may be a want. After the expenses have been categorized, the 50/30/20 model can be used to budget upcoming expenditures.
Needs: 50%
These are expenses that are essential for people to be able to live and work. Some common expenses may include:
- Rent or mortgage
- Transportation (personal vehicle or transit pass)
- Groceries
- Basic utilities
- Insurance
- Loan payments
- Childcare
Wants: 30%
These are expenses that aren’t essential to living and working. They’re luxury items, not necessities. Some examples of wants include:
- Video game consoles
- Coffeehouse drinks
- The latest iPhone
- Designer clothing
- Cable or streaming subscriptions
- Gym memberships
Savings and Debt Repayment: 20%
The final 20% in the 50/30/20 model is reserved for savings and paying down extra on any debt. Examples could include:
- Starting an emergency fund (people should aim to save away at least 3 months’ worth of expenses)
- Investments
- Saving for retirement
- Paying off debt (loan payments are categorized as needs, but extra payments should be factored in here)
Using the 50/30/20 model, someone taking home $3,000 a month would budget for spending $1,500 (50%) on needs, $900 (30%) on wants, and $600 (20%) on savings and debt repayment.
While calculating the 50/30/20 rule can be done on paper, this online 50/30/20 budget calculator provides people with access to an easy, streamlined budgeting strategy that can help them stay on top of their finances. As always, if you have questions about creating a budget that works for you, contact your local credit union for help.