The first full week of January 2022 is just about over, and with the festivities behind us, there is a sense that it is time to buckle down and start to get our lives in order for the rest of the year. Following up from our earlier article, Top 5 Money Goals To Set For 2022, and assuming that you have already identified some financial goals that you would like to achieve this year, now is the time – if you have not yet done so – to think through the strategies you will need to achieve those goals.

However, and in order to ensure that you have a clear understanding of your current financial health, it is important to examine your spending habits and overall attitude with respect to money. To get a good sense of your spending habits, it would be ideal if you had been tracking all of your expenses. If you had not been doing so, we recommend that you spend some time jotting down all of your typical expenses and the estimated spend in a given month, as well as any provisions that you have been making towards saving and investing. At the end, tally up all of your outflows for a month and compare it against your (typical) income for a month. More likely than not, you will be surprised by all of your outflows, “I never realised how much money I have been spending!”. It is also possible that your outflows may even exceed your inflows, or that your outflows are uncomfortably high relative to your inflows, and so it is time to take a closer look at your expenses and spending habits.

 

Understanding Wants Versus Needs

A frequently overlooked fact is that not all expenses are created equal. A crucial factor that is rarely discussed is whether a particular expense is a ‘want’ or a ‘need’.

To be clear: when we to classify an expense as a ‘need’, it would indicate that it is a mandatory or fixed expense that is essential for daily living. Generally, this category consists of:

• your basic living expenses, such as rent or mortgage, utility bills, food;
• essential healthcare items, such as prescription medication and  treatments;
• job-related expenses, such as to commute to work, uniforms, etc.

One the other hand, expenses that would be classified as ‘wants’ would be discretionary expenses. This category tends to consist of non-essential items and expenses that we can live without, but would like to have, as they allow us to live more comfortably. Examples include:

• Eating and drinking out;
• Entertainment and leisure;
• Home décor and electronics;
• Monthly subscriptions and memberships;
• Television and music streaming subscriptions;
• Beauty and spa treatments;
• Designer clothing;
• Premium or luxury vehicles or transportation;
• Travel.

The above list is not exhaustive, and you may be inclined to protest that the above items are essential to your life and lifestyle. Or, based on your income and work position, you are (or should be) able to afford these things.

It is emphasised that everyone’s wants and needs will be different. More importantly, they ought to be able to peacefully coexist within each individual’s budget – with priority being given to the needs, or the mandatory or core expenses, in the first instance.

 

Reassessing Your Wants

In the event that your discretionary spending may need to be reined in, it is now time to determine whether for each category, the spend can be eliminated altogether or reduced. Typically, discretionary expenses tend to fall into two camps: large, but occasional; or modest, but more frequent. Noting that you might already be resisting the elimination of a spend category, such as eating and drinking out, a better approach would be examine the amount being spent and identify ways it can be reduced, in keeping with your budget.

For example, if every weekday you buy a coffee from one of the popular coffeehouse for $ 5.00, as well lunch from a eatery nearby for around $ 15.00. Although these might seems like a modest spend, it add up: $ 20.00 per day, $ 100.00  per week, $ 400.00 per month, or $ 4,800.00 per year! Further, if your take home salary is $ 48,000 per year, it would mean that you are spending 10% of your salary on one meal and a beverage. So some questions that could be asked include:

• It is possible to eliminate this expense altogether?
• If the answer is ‘no’, how can I cut back?
• Do I need buy a coffee every day, or at all?
• Do I need buy a lunch every day, or at all?
• Can I carry a packed lunch from home instead, or at least most days?

For large discretionary spends, such as purchasing designer products or travelling, it may be more possible to eliminate those types of expenses, or at the very least, make them less frequent. Also, a more budget-friendly approach would be to apportion an amount from what you have allocated for discretionary spending towards saving for those purchases – and not use your savings (or emergency fund) to pay for these expenses. Yes, it may take time to accumulate the amount needed to pay for these luxury purchases, but it help limit impulse buying, especially when you have credit cards at your disposal.

 

Reassessing Your Needs

It is also emphasised that similar to the exercise suggested in the previous section for your discretionary expenses, it may be necessary to also revisit your core expenses for any cuts that can be made, in order to balance all of your expenses. As an essential expense, it may not be possible to eliminate it, but to reduce the amount spent.

For example, although food is an essential line item, you may no longer be able to shop exclusively at premium supermarkets. Instead, you could consider purchasing basic food items from a more budget-friendly store, and shop at the premium stores for fewer items every once in a while. Or perhaps in order to have a more manageable electricity bill at the end of the month, you can use the air-conditioners less frequently, and turn them off when you’re not home. In order words, you may need to see how and where you can save on these core expenses.

 

Building A Budget To Balance Wants And Needs

Finally, when building a budget, the following ratio is recommended for your expenses: 50% of your budget should go towards needs or your core expenses; 30% towards your wants or discretionary expenses; and the final 20% should go towards your savings and/or to pay off debts. So, if your take home salary is $ 1,000, it would mean that up to $ 500 can be used needs, up to $ 300 towards wants, and no less than $ 200 towards savings and/or servicing debts.

In having dollar figures to work with, you can now determine whether your spending follows the 50:30:20 ratio, and if not interrogate each expense category to see what adjustments can be made. Ultimately, the goal is to properly manage your budget, and try to achieve a healthier balance in your spending habits.

 

In summary, this exercise to balance wants and needs is really about thinking critically about essential and non-essential expenses generally, and within the context of your budget and spending habits. At the end of the month, many of us have no idea how we have spent our money, but the results are reflected in our bank balances. Moving towards greater financial literacy and financial health requires greater awareness and mindfulness, which is not just in terms of knowing the dollar amounts we are spending, but also in being able to examine our spending habits and to figure out the reasons behind the choice we are making.

 

 

Image: Towfiqu barbhuiya (Pexels)