Budgeting is important at any time of the year, but if you go into the year-end holiday season without a plan to guide your spending, you could end up with financial stress in January.
For some people, a personal budget is little more than a list of expenses. While this is better than no budget at all, simply writing down the bills you have to pay is not giving you the value you should get from a budget.
A far better way is to divide your budget into needs and wants.
What are needs?
Needs are the things you must have to survive:
Depending on your circumstances, other examples are transport and childcare, and if you work from home, Wi-Fi and a computer.
The amounts you spend on needs often do not change much from month to month.
What are wants?
Wants are items and services that are nice to have, but that you can live without, such as:
The money you spend on wants often vary from month to month, except when you sign a contract for something like a smartphone or satellite TV.
But it’s not always clear and easy
Can somethings be both a need and a want? The short answer is yes.
For example, even though food is a need, snacks and desserts, takeaways and restaurant meals definitely fall in the wants category. Some people may think fresh fruit and vegetables are a want, but if you consider how good they are for your health, they should be on your needs list.
Debt repayments is another example. While defaulting on your loan will not lead to your death, it will seriously affect your financial wellness and, eventually, your and your family’s overall wellbeing. For this reason, debt repayments belong on the needs list. But it doesn’t mean that every loan is automatically driven by need. Taking out a personal loan to buy clothes or throw a big party is not meeting a need.
What if I have more needs and wants than money?
If your personal budget does not balance, start by reducing the amount you spend on wants. If you usually meet up with friends for drinks three times a week, cut down to once a week. Do fewer non-essential trips in your car to save on fuel and take a lunchbox to work instead of buying takeaways. Another idea is to make list before you go shopping to avoid impulse buying.
It is often possible to cut back on your needs too. For example, you may be able to switch to a cheaper phone plan, shop around for a better car insurance deal, or find less expensive childcare options. If you juggle multiple loan repayments, look into debt consolidation.
The key to cutting down on expenses, is to track every cent you spend. Once you know where your money actually goes, you can change your spending behaviour.
Prioritise, prioritise, prioritise
Another tool to help you manage your spending, is to prioritise your wants and needs. Divide each category into high and low priority. A high priority need is one you cannot afford to default on, such as your rent or enough food to eat. A lower priority need is an expense you might be able to negotiate.
Priorities will change depending on your circumstances. When you know you have to save for an upcoming expense, such as December travelling, you can stop buying clothes for a few months and increase the amount you save.
Remember that your budget is not cast in stone. Work with it regularly as you track your expenses and do an income/expenses reconciliation at the end of every month. Also keep reminding yourself that spending your money is a choice that is informed by needs and wants, and that you have power over your choices.
With these tools, you can keep financial stress at bay and work your way to long-term financial health.Go back