One of the most common questions I get asked is how to balance a budget. This is something a lot of people (maybe even most people) struggle with and there are a lot of little things which go into maintaining a budget. In an effort to help people make their own successful budget I’ve put together a series of tips which, over the years, I have found useful.
The first and one of the best tips I can suggest to people is to make a distinction between things you want and things you need. You need food to survive, you need clean water, you need shelter (in most climates), you probably need clothes in your society/climate. Most things beyond these core items are things you want.
Many things we take for granted, which seem essential are really wants you desire rather than actual needs. You don’t need microwaves, televisions, new cars, designer handbags, rugs, Netflix, coat racks, earbuds, etc. They may be nice to have, a few things (like reliable transportation and a stove to cook meals) may be borderline essential in our society, but they aren’t, strictly speaking, needs.
One of the most useful tips I’ve applied to my own budgeting over the years is to break all potential purchases into one of three categories: Needs, Should Haves, and Wants.
Needs are, as I mentioned above, things essential to survival like groceries, clean water, a warm place to sleep in the winter, and clothing. These are things I prioritize and make sure I can pay for first.
The next category, Should Haves, identifies things I should acquire in order to be a fully functional member of society. These may include things like a phone (it’s hard to get and maintain a job without communication), food bowls, a place to cook, some form of transportation or way to get around so I can acquire food and go to jobs, a few chairs for when people visit. When there is money left over after purchasing needs it makes sense to start buying things in this category to better become a functioning member of society.
The last category is Wants and this covers everything else. Computers, nice shoes, microwaves, coffee, candy, toys, a Disney+ subscription, alcohol, lamps, artwork, and so on fall into the Wants category. It only makes sense to start purchasing items in the Wants category when all Needs and items in the Should Haves category have been checked off your list and you still have money left over.
Where I find many people fall into a budgeting trap is confusing wants with items they should have or need. Sometimes these items may be fairly clearly mislabeled. For instance, if you can’t pay for fuel for your car (a should have if you want to get to work) you shouldn’t buy a new blender (which is a want). If you are having trouble paying rent (shelter is a need) then don’t buy stuffed animals and fancy new ice cube trays (which are both wants). You may want a couch, but you should have a phone and need to pay for heat.
A lot of people have trouble making these distinctions, largely because most of us are so accustomed to seeing our wants as standard items or as normal. If almost everyone you know owns a toaster and sofa then it’s easy to see those things as items you need. But they aren’t, neither toasters nor sofas are essential to survival.
I sometimes hear people, usually young adults, talk about how expensive rent is (which is fair), but it turns out they’re having trouble finding a place because they are set on getting a three bedroom apartment in a downtown area with no roommates. Why a three bedroom? One for them, one for guests, and one for a home office or den. Plus they want to furnish it and have a nice microwave and a TV and… You get the idea, they’re set on a certain level of comfort (of wants) and it’s killing their budget which prevents them from acquiring their needs.
Identifying want is really essential versus what is nice to have is key to starting a balanced budget. Sometimes when you’re starting out you need to get the bachelor apartment and sleep on a mattress on the floor, sometimes you need to learn to cook and not put everything in the microwave, sometimes you need to stay home on the weekends to afford transportation to your job, sometimes you need to forgo a game console to be able to buy appropriate clothes for work, sometimes you need to get a roommate and forget about having a home office in order to afford the heating bill.
In short, when you’re starting to write out your budget, first identify what you really, truly need (food, shelter, heat, clothes). Make sure those items are paid for first. Then add in things which would make your life a lot better like a car, bed, kitchenware. Then, after all of those things are covered and paid for, put any money you have left over toward things you want. Be really honest with yourself as to whether a purchase is something you truly need or if it’s something you can wait to get after you’ve saved up some money.
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