Creating a Budget Around Needs and Wants
Photo courtesy of pexels/Rodnae Productions.
You know you're adulting when you block out time to set up a budget. Life comes at us in stages. Maybe you're in your 20s and truly starting the adulting process, with a household budget for you and a significant other. Perhaps you've hit midlife and have many more "wants" than you have money for (think that midlife crisis car or he/she/they shed that's tricked out to the max). Eventually, you need to manage what comes in with what goes out regarding finances. That's when building a budget and monitoring it becomes a must, or at least an "I/We really should" kind of thing. There are many ways to build a budget, but like dieting, the kind of budget that works is the kind you're still to and experience success with. I'm outlining steps to create a "Needs and Wants" type of budget. You can try many others, but this one is probably the most realistic and gives you a reward for success.
The 50/30/20 budget
Popularized by Elizabeth Warren, the 50/20/30 budget divides up your income based on needs, wants, and money to save. This budget requires looking at your after-tax income (regular income, side hustles, and anything else you receive regularly) and then building your budget as follows:
- 50% towards needs (housing, food, utilities, etc.)
- 30% for whatever you WANT
- 20% going into savings and debt repayment
That requires some serious work if 50% of your earnings don't COVER your needs. Is that you? If so, you either need to work on reducing the cost of your needs or finding more income. It's not easy, I know.
Keep in mind, paying for needs with a credit card or a loan and then figuring you'll pay those off with part of that 20% set aside for savings and reducing debt is NOT what we're going for here. That's an addictive cycle that will run you right into the ground.
Also, if you have funds taken from your paycheck for retirement (which I highly recommend no matter your age), that also counts as part of the 20%, meaning you can add that money into the total net earnings you're working with. Does your company match a portion of that savings? You can add that as well, to give you a larger pool to play with. BUT if you're having to play with numbers, so your 50% amount works, again, that's a dangerous game.
What do I really "Need"?
It's a thought worth having, but if you're honest with yourself, it should be clear:
- Mortgage or rent
- Pet care (and yes, you don't need a pet, but if you have one, it is your responsibility)
- Gas/Transportation/Auto Loans
- Internet access (IF you need it for your job!)
- Minimum monthly payments on all debt
While you may feel that Netflix or Friday Night Pizza Night are "needs," they're not. Sorry. Unless you get paid for watching or eating.
But I want a lot of stuff, in fact, I need it!
Yes, in today's world, a want can feel like a need. It's easy to get caught up when your social circle heads out for drinks after work every Tuesday, or you've decided you love a particular gym, or your family expects gifts for every birthday, holiday, etc., AND your significant other has an expectation of a cruise or climbing Machu Pichu this year. But if you're serious about this budget thing, and the cost exceeds 30% of your net income, you'll need to scale back expectations or spread these events out over multiple years (or SAVE UP FOR THEM!).
There are also times when feeding a want can be a reward or something to perk up your spirits after a particularly bad day. It keeps you going and makes things feel better. I get it. And there is money in the budget for this. Never fear! But let's be honest, these are not essential, and you CAN live without them. Plus, with this budget, you can plan for them. That's what that 30% piece is for.
Budgeting doesn't mean no more fun. Believe it or not, you may still be able to afford all these extras. You just need to make choices a bit more wisely. Drinks every Tuesday? Stop going top shelf, and maybe suggest a local brewery visit with a tasting rather than buying rounds for everyone at your favorite place. Birthdays and holidays? How about choosing names, so each person only has to buy one gift. Cruise or lifetime experience on the agenda? Budget shop and see if you can reduce the overall cost or push it off a year or two to save up. Just keep that overall cost below the 30% mark per year or month or whatever you're budgeting to. Prioritize those wants, and you may realize you CAN have it all. Just not ALL OF IT RIGHT NOW! It's time to step away from the Veruca Salt personality and be a bit more like Charlie. (For those who are fans of Roal Dahl's children's book.)
Savings, it's never too late or too early to start!
Don't think it's too early to start saving for retirement. Do you know how much you should have saved by the time you reach 21?According to The Motley Fool, if you've saved up $6,000 by the time you're 21, you're far ahead of your peers when it comes to saving. Keep in mind that this considers you probably don't have a full-time job and probably don't make a big paycheck... yet. If you're also paying for some of life's "needs" at this age, it will reduce how much you could save. But still, it represents putting away just $1,000 a year between the ages of 16 and 21. In fact, that's just about $19.24 a week. It's a number to shoot for in any case. Not quite there yet? Not to worry. Even if you put away just $5/week, you're on your way. Get a raise or a new opportunity? Chunk away a bit more, and keep it up! Don't touch it. That money is for bigger adventures.
Do I need an emergency fund?
Yes. That's the short answer. How much? Some sites say 6 months of "needs expenses," some say 3 months. I'd say set 3 months of actual "needs expenses" as a goal and leave it there. If you don't have any emergencies and can keep those funds set aside for six months, set a new six-month goal. And again, see if you're able to just leave it or if you need to draw from it for unexpected expenses; a job layoff, car repair, household emergencies, etc. If you do, start again and save that amount back up. An emergency fund is essential because emergencies happen when you least expect them. Also, keep in mind that emergency money needs to be liquid. If you need it, no one will wait for a broker or the stock market to get that money to you. It should be saved in a regular savings account, earning interest/dividends.
I have my emergency fund; now what?
Once you've got a solid emergency fund and you're contributing to your 401K at work to the total amount matched by your company, it's time to start thinking about additional retirement savings. Not quite able to put that full amount away yet? That's your first goal. Work towards putting at least enough away to get your full company match. Just set an automatic increase of 1% per year. You'll get there! Then, whether you want to invest in the stock market, open a Roth IRA, or perhaps a combination. Do your research.
If you're interested in starting small with retirement savings, MIT Federal Credit Union offers traditional and Roth IRA Certificates and Savings accounts. Learn more about IRA accounts here. Or perhaps it's time to consider working with a financial planner. MIT FCU offers access to LPL Financial for these types of services.
Whether you're just starting out or looking to diversify and grow your savings, the important part is you do it. Don't worry that you only have a small amount available to set aside; even small amounts can add up.
But how much do I need to retire?
These days, many people are looking to retire early. Still, there are plenty out there now who have to work well past the usual age of retirement because they just didn't start saving early enough or didn't have the funds available set aside. Or maybe the recent economic turmoils have caused retirement funds to suddenly disappear or require use for something else. As I mentioned above, Life happens, and sometimes it takes everything you have in savings to keep things going. Nerdwallet offers a great retirement calculator to play around with the numbers. Keep in mind that everyone's life expectancy is different. If you've got a family of centenarians, you might need to plan for a longer life than usual. Are you expecting to "live large" when you're older? Looking to have multiple homes, travel the world, and retire in your 40s? That may cost a bit more than the usual retirement savings goals. Give those things some thought and look at the calculator from that perspective. It may result in you changing your mind and your plans!
Many people think they need a million dollars to retire. That would be nice, but maybe it's unrealistic or not really necessary for you, or maybe it isn't enough! Don't forget, if you stick to your budget, you may have already paid off your mortgage when you reach retirement. Perhaps your plan is to move to an area with a lower cost of living, or maybe you'll work during retirement, a job that feeds your passions rather than one that brings home the big bucks. Think about what you want, and realize that those wants may change as life happens. And finally, sometimes life happens and THAT changes all of our plans. You've got to be prepared to deal with what comes along.
So how do I create/track my budget?
Numerous sites offer calculators for the 50/30/20 budget. Below are a few links to get you started:
What if I don't like this whole needs vs. wants thing? What else is there?
OK, you're right. This isn't the only way to budget. And if you don't have enough for your needs, how can you plan for wants and savings… isn't that depressing? No! Don't stress over it. I entered the search term, "What should I use for a budget if I'm just starting out," and found 4.9 Billion, yes, BILLION results! There are so many ways to start budgeting, and you'll have endless chances throughout your life to rethink your budget, redirect your earnings, choose different wants, discover new needs, and set new goals for those savings. The important thing is to start… if you haven't yet, why not take the first step today?
Looking for some other budgeting options?
- Money Tamer offers their Budgeting for Beginners
- Check out Savvy Budget Boss' Budgeting Tips
- Busy Budgeter helps you get started when you struggle with budgets
There are also apps to help!
At MIT FCU, we offer members a budgeting app that helps track their spending. It's called Money Management. You can set goals and receive alerts when you're nearing your set limits from certain expense types. You can also see where your money goes! There are other apps out there as well. Nerdwallet lists the following as the top 8 budget apps for 2022:
*These apps also made our list of Top Five Budgeting Apps back in 2020, and they're still going strong. You can read our review on budgeting apps from 2020 here. Keep in mind there may be a fee associated with some of these. Visit the nerdwallet site to learn more.
Hopefully, this post will give you enough information to get you thinking about your budget more positively. And if you don't already have one, what are you waiting for? Get started today and know how much money you have, how it gets spent, and how you can plan for the future, prepare for the unexpected, and get those "wish-I-hads." It's possible for everyone, even if it's a longer process than you might wish.
Already have a budget and wonder how you can reduce some of those "needs" column expenses? Check out the rest of our series on Life on a Budget:
- Life on a Budget - 5 things that can make or break it
- Auto Expenses - and we don't mean the loan payment
- How Much Does it Cost to Own a Pet - Cute and Cuddly Costs Money!
- Utility Expenses - Gotta Light? (Lowering your energy costs)
- Utility Expenses - Stay Cool! (Saving money on air conditioning)
- Utility Expenses - What's Heating You? (Lowering your heating costs)
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