Money management is a simple yet effective concept that can help you stay on top of your finances. But it continues to remain elusive for many as they struggle to apply it to their daily lives. They often find it difficult to understand where to draw the line when demarcating their needs and wants. 

It is vital to strike the right balance between needs and wants and account for them separately. Not doing so may impact you adversely and affect other long-term financial goals as well. Here is a detailed guide into what constitutes your needs and aspirations/wants and how to budget for them effectively.

What are Needs?
 

Needs are basic requirements without which life cannot be sustained. Simply put, all expenses that support your survival (food, clothes, housing, transportation, insurance, electricity) can be termed as needs. They are indispensable and remain constant always. Today, access to healthcare and education are also considered important needs and have become an integral part of our lives.

What are Wants?
 

Wants are things or experiences that you crave or allow you to live life in greater comfort. Any expense that doesn’t directly impact your survival can be safely clubbed under wants. Examples include leisure travel, club/gym memberships, Netflix or other streaming service subscriptions, trendy apparel, gadgets, etc. You can survive without wants, which are optional expenses. 

While there is a distinct line separating needs and wants, a grey area remains. For example, if your job requires you to commute to big organisations, meet HNIs or the like and drive high net worth clients around, then sure, a big and expensive car may well fulfil a need. The reverse holds true as well. You may think that having food outside is meeting a need (satiating hunger), but packing lunch from home will accomplish this at a much lower cost. So, eating at a restaurant is more of a want.

How to Distinguish Between Needs and Wants
 

As you learn to differentiate between your needs and wants, you start to exercise control over unnecessary spending and take charge of your financial situation. The below exercise will not only help you identify the areas of comparison between needs and wants but also answer the question how to manage money better.

The above table highlights the key differences between needs and wants. But why do people have a hard time classifying their needs and wants separately and go overboard with their expenses? Well, as mentioned earlier, there is a grey area that may be tough to navigate. It is completely upon the individual to decide if their ‘need’ turns out to be a ‘want’ in reality.

It is best to do the exercise by listing out all your expenses and classifying them as needs and wants as you go along. Put a tick in the appropriate column.

Again, be aware that certain items you classify as ‘wants’ may be on someone’s ‘needs’ list. It is a subjective decision that needs to be taken after a careful analysis of your monthly income. Having said that, try not to spill your wants into the needs domain. This can unknowingly land you into financial trouble sooner or later.

How to Budget for Needs and Wants
 

Ask a financial expert how to create a financial plan that aligns with your long-term and short-term goals. At the outset, most would recommend creating a budget for your needs and wants. But how can you go about this? The popular 50-30-20 rule of budgeting is probably one of the best tools to create a budget based on your needs and wants. 

The rule states that out of your total income:

• 50% should go towards meeting your needs
• 30% should go towards your wants
• 20% should go towards your savings

It’s as straightforward as that!

Let's understand this better with the help of an example. Create a pie chart of your total expenditure - something like the accompanying illustration, where 58% of the income goes to fulfil needs, 40% to meet wants, and a meagre 2% towards savings. The overall scenario doesn’t look good, as way too much is being spent on needs and wants, almost completely ignoring savings. 

Of course, this percentage breakup could differ from person to person. Also, it can vary depending on certain additional expenditures that may crop up during a particular month. For example, you may be planning to celebrate a loved one's upcoming birthday, which can increase your expenses for that month. 

Continuing with the above example, it's time to make category-wise adjustments to arrive at a suitable budget that can help you meet your financial goals.

• Classify Expenses Properly: Look closely and move expenses around. Do you really need to go on vacation twice a year? No, you don’t. Classify it as a want. Considering you are already going overboard with your expenses in the ‘wants’ section, you may want to restrict your travel or forgo it for the upcoming year. In short, what you may feel is a need could be a want.
• Reduce Necessary Expenses: Trim your ‘needs’ expenses by opting for cheaper options. For example, seek better insurance options that provide you with more coverage at a lower premium. This can cut expenses that are necessary but still open to downsizing.
• Open the Best Savings Account: Having a savings account will help you systematically save money. IDFC FIRST Bank offers the best savings account that will not only help you save your surplus funds but also promise comparatively higher savings account interest rates.
• Trim Expenses on Wants: Similarly, cut down expenses in the ‘wants’ section by being prudent with your monthly expenses. For instance, you could limit dining out, watching movies at the theatre and impulse shopping.

Enabling Better Money Management
 

You may occasionally feel pulled in all directions as you go about satisfying your needs and aspirations, with little or no scope to account for future expenses. Revisit the 50-30-20 rule and cut back wherever possible. Remember, the whole exercise is to help you limit your needs, practice control over your wants, and save for your future life and that of your loved ones.

IDFC FIRST Bank helps you save prudently with the help of the best savings account. It lets you earn interest at attractive rates, along with monthly interest credits, free and unlimited ATM withdrawals, and much more. 

You can open two types of accounts with IDFC FIRST Bank:

1. Minimum average monthly balance of Rs 25,000 - comes with a Visa Platinum Debit Card
2. Minimum average monthly balance of Rs 10,000 - comes with a Visa Classic Debit Card

With additional benefits such as complimentary airport lounge access andpersonal accidental and death cover, an IDFC FIRST Bank debit card gives you access to some incomparable features. Get in touch with us today to understand the benefits of opening a savings account with IDFC FIRST Bank!

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.