Making a budget for the very first time is difficult. You might know this spending plan needs balance to work in theory, but it’s not always clear how you can bring equilibrium to your spending in practice. The average budget contains a lot of bills and purchases that can overwhelm or distract you.
Stripping them down to the basics can help. These three building blocks underscore your top spending priorities, so you can balance your next budget with ease.
Your needs represent the essentials that you need to live safely. They’re usually regularly recurring bills, but they may include variable or one-time expenses.
Here’s a list of the most common ones below:
- Housing costs
- Insurance payments
- Minimum payments on installment loans and lines of credit
This last bullet may not look like the others, but it’s essential in its own right. If you took out an installment loan online as a short term financial solution to an unexpected emergency, making its scheduled payments keeps your account in good standing.
If you skip them, you could wind up with late fines, added interest, and even damage to your credit score depending on your lender. The same goes for any personal loan, line of credit, or credit card you have in your name. You’ll want to hit every minimum payment to avoid costly consequences.
Your wants represent discretionary expenses. You could live without them, but you wouldn’t want to because they bring excitement, comfort, or joy to your day-to-day life.
By definition, wants are the opposite of your needs. But sometimes, it’s easy to confuse your needs and wants, as there are some overlaps. Take, for example, transportation costs. While you may need a car, you could get by with an affordable sedan. A want would be upgrading that to a luxury sports car.
Other wants may include:
- Food (above and beyond basic groceries)
- Designer clothes and shoes
- Interior decoration and cosmetic renovations
Savings are there to help you prepare for the future.
Since everyone’s future is different, what you end up saving for may vary from person to person. While you might want to go to school one day, someone else may have travelling on the brain. You’ll squirrel away your earnings into an education fund, while they’ll focus on saving for holidays.
That said, there are some things that everyone should save up for.
Rainy Day: An emergency fund is there to help you when unexpected emergencies come your way, so you don’t have to rely on credit cards or installment loans online.
Retirement: If you don’t want to keep on working until the end, you’ll want to set aside some cash for your golden years.
Debt Repayment: You should also put aside some money to pay off debt faster. This goes above and beyond your minimum payments, provided you won’t be penalized for making additional payments on short term loans or lines of credit.
How Much Should You Spend on Each Building Block?
If your monthly take-home income represents 100% of your paycheck, each building block gets a certain percentage. Just how much depends on your unique circumstance, but people generally follow this breakdown:
Needs = 50%
Wants = 30%
Savings = 20%
Once you start budgeting, you can tweak these percentages to fit your lifestyle. Your budget is there to help you pay bills and prepare for the future, so try to prioritize your needs and savings over wants. And remember, they have to add up to 100%.