6.7 Needs Vs. Wants

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Budgeting

6.7 Needs vs. Wants

Activity

Name

My Discretionary Spending Plan

Although online resources and financial gurus will tell you that it’s pretty clear cut for what qualifies as a need versus a want, in real life it’s often not that clear. For example, if you decide to live in Cleveland, while your family lives in Phoenix, and visiting them is a priority for you, then you might consider 4 flights a year a necessity. On the other hand, your extreme love of scuba diving might make 4 flights a year to Hawaii or Florida seem like a need, when it’s possibly more of a want.

à Read Article attached at the end of this worksheet BEFORE completing the questions below.

1) Consider This Example

Maxine graduated from college and got an intro-level job in human resources at a large company in Washington, DC. Leftover from college, she has one nice suit, a few business appropriate dresses and blouses, and one professional pair of shoes. Her job requires her to be in business attire every day for work.

1.  Would you consider upgrading Maxine’s wardrobe a need or a want? Explain why you feel as you do.

2.  Assume that Maxine decides that she needs a wardrobe update. What would you feel is an appropriate amount of business clothing for Maxine to own in order to succeed at her job?

3.  What should be Maxine’s approach to purchasing her wardrobe updates?

2) Assessing Your Values Around Purchases

If you started the unit with our Income Based Budgeting activity and then did the lessons that followed, you realize that we’ve already completed a budget for food, which probably included needs (basic ingredients for each meal) and wants (eating out, buying ice cream, etc). This is true of other categories as well: cable television, trips to a hair stylist, or a gym membership. On the other hand, there are numerous other categories of possible needs and wants that we haven’t addressed.

Review the list below, putting a:

●  1 next to those that are needs for you,

●  a 2 next to high priority wants, and

●  a 3 next to low priority wants.

●  You can leave some blank if they don’t fit into your lifestyle at all.

●  Fill in the three empty boxes with items we haven’t included.

# / ITEM / # / ITEM
In-style clothing or the latest trends / Personal hobbies (membership or entry fees, equipment, uniforms, etc)
Non-essential beauty/hygiene or grooming items/services / Professional expenses (books, resources, subscriptions, membership fees, conference attendance, etc)
Subscriptions (Netflix, Hulu, magazines, newspapers, etc) / Holiday and other gift giving
Premium or pay-per-view cable content / Charitable donations
Vacations, travel / Vehicle upgrades
Electronics (tv, stereo, video games, phones, etc) / At-home entertainment (books, movie rental, music purchases, hosting friends, etc)
Out-of-home entertainment (amusement parks, movies, bowling, etc)

3) Plan Your Discretionary Spending

Reflect on the priorities you’ve set above, and consider the status of your Income-Based Budget as a whole. Use this information to create a budget for the wants you’d like to be able to fulfill each month, while still keeping a responsible spending plan. In the space below, answer the following:

4.  How much do you plan to spend each month on wants or discretionary spending?

5.  What considerations did you take into account to come up with that figure?

6.  What types of items will your discretionary spending cover?

7.  Which of those items would be easiest to give up, if your life circumstances forced you to?

8.  Which items would be hardest to give up? Why?

9.  How do your values inform your spending decisions in this category?

4) Revise Your Salary-Based Budget

Go back to your Salary-Based Budget project from Lesson 6.1 Budgeting Basics and revise the category for Wants based on your budgeting knowledge and work within this activity. Remember, your ultimate goal is to end your complete budget with a surplus, and your budget should now be complete.

The 50/30/20 Rule of Thumb

Elizabeth Warren's 50-30-20 Rule Helps Guide Your Budget

By Paula Pant

Budgeting & Personal Finance Expert

Congratulations, you've created a budget. You're aware of how much money you spend on your home, your car and your retirement fund. But how does your financial allocation compare to the amount youideallyshould spend and save?

Harvard bankruptcy expert Elizabeth Warren - named by TIME Magazine as one of the 100 Most Influential People in the World - and her daughter, Amelia Warren Tyagi, coined the 50/30/20 rule of thumb in the book they co-authored together, "All Your Worth: The Ultimate Lifetime Money Plan."

The 50/30/20 plan outlines the following four steps:

Step One: Calculate Your After-Tax Income.

Yourafter-tax incomeis the amount you collect after taxes are taken out of your paycheck, such as such as state tax,local tax, and Medicare andSocial Securitytax.

If you're an employee with a steady paycheck, your after-tax income is easy to figure out. If health care,retirement contributionsor any other deductions are taken out of your paycheck, simply add them back in.

If you're self-employed, your after-tax income equals yourgross income, minus yourbusiness expenses(such as the cost of your laptop or airfare to conferences), minus the amount you set aside for taxes.

Step Two: Limit Your Needs to 50 Percent.

Review your budget. Note how much you spend on "needs" such as groceries, housing, utilities,health insuranceand car insurance. The amount that you spend on these "needs" should be no more than 50 percent of your total after-tax pay, according to the 50/30/20 rule of thumb.

What's a need and what's a want?

That's the million-dollar question. Any payment that you can forgo with only minor inconvenience, like your cable bill or your back-to-school clothing, is a want. Any payment that would severely impact your quality of life, such as electricity and prescription medicines, is a need.

If you can't forgo a payment, such as a minimum repayment on acredit card, it is also considered a "need," according to the Warren and Tyagi. Why? Because yourcredit scorewill be negatively impacted if you don't pay the minimum.

Read More: Here's a worksheet that helps youcalculate the cost of your "needs."

Step Three: Limit Your Wants to 30 Percent.

On the surface, Step Three sounds great. Thirty percent of my money can be put towards my wants? Hello, beautiful shoes, trip to Bali, salon haircuts and Italian restaurants.

Wait! Not so fast. Remember how strict we were with the definition of a "need"? Your "wants" include your unlimited text messaging plan, your home's cable bill, and cosmetic (non-mechanical) repairs to your car.

Sometimes you'll buy a "need" that upgrades to a "want." Bread is a need; Oreo cookies are a want. Yes, they're both classified as "groceries," but one is clearly discretionary.

You may spend more on "wants" than you think. A threadbare minimum of warm clothing is a need. Anything beyond that - such as shopping for clothes at the mall rather than the discount outlet - qualifies as a want.

Read More: Here's a worksheet that helps youcalculate how much you spend on "wants."

Step Four: Spend at Least 20 Percent on Savings andDebt Repayments

Spend at least 20 percent of your after-tax incomerepaying debts and saving moneyin youremergency fundand yourretirement accounts.

If you carry acredit card balance, theminimum paymentis a "need," which counts towards the 50 percent. Anything beyond that is an additional debt repayment, which qualifies towards this 20 percent. If you carry a mortgage or acar loan, the minimum payment is a "need" and anyextra paymentscount toward your "savings anddebt repayment."

Read More: Here's a worksheet to help youpay off debt and get closer to your savings goals.

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