How can you bring your fixed expenses below 50% of your take-home income? The answer lies in part in differentiating between Needs and Wants. Knowing what you absolutely need versus things that you would prefer to have, or things that you want, is essential to building a 50-30-20 MoneyPlan for yourself and your family.
We all have basic needs in our life — shelter, clothing, and food. Each person in the family has additional needs that cost money. However, there is a difference between Needs and Wants. A Want is something you would like to have but could live without. It is important to discuss with your family what their Wants and Needs are and how these fit into the family’s financial plans.
A car may be a Need for the family, but a new car most likely is a Want. Would you consider a radio in the car a need? What about a CD player? A phone in the house may be a Need for your family, but a cell phone could be a Need or a Want.
When deciding whether an item is a Need or a Want, it helps to ask yourself the following questions:
- Could you live without this for 6-months to a year?
- If you didn’t have this, could you live in safety?
- Would you keep spending money on this if you lost your job and had only unemployment income?
- Does a less expensive version of this exist that would fulfill the same function?
Now go through the list on this worksheet and mark each item as a Need or a Want. You should have each member of your family go through this list, and add their own items if necessary, to discuss your family’s Needs and Wants. In addition to identifying Needs, think about what monthly minimum expense would satisfy this Need without the Need turning into a Want.
Take your time in completing this worksheet. Discuss it with your family, and don’t be afraid of debating how much you actually need to spend on an expense versus how much you would want to spend on it.
Look at various items that you probably spend money on.
For each item, check whether it is a Need or a Want.
For each item that you designate as a Need, consider two things:
- Is a less expensive alternative available? (For example, could you find housing for less money, could you find cheaper auto insurance, could you reduce your water usage, etc.)
- What is the minimum amount you MUST spend on this item in order for it to qualify as a Need, rather than as a Want? (For example, electricity is a Need, but you can easily use more than what you absolutely must have. What is the absolute minimum amount that you must have?)
Compare the Monthly Minimum amounts for Needs with what you are spending on each (Worksheet 1). For every item where you are spending more than the absolutely necessary, amount you will need to find ways to bring the cost of your Needs down to the Monthly Minimum level. In other words, you need to cut out the fat, which is the Wants portion of even the basic Needs, such as housing, food and transportation.
For a very helpful detailed discussion of how to go about trimming your fixed expenses we recommend reading Elizabeth Warren’s book: All Your Worth: The Ultimate Lifetime Money Plan. Try to get it at your library, or buy it used online.