I’m going to start off with an interesting statement.

Many of the personal finance problems people face today are due to confusion between things they want and things they actually need.

It’s true, distinguishing between a want and need can be very difficult, especially when we are being persuaded by outside influences, i.e. salespeople, friends, co-workers. 

There have been times in my life where this particular subject was very, very blurry.  Like the time I needed a $15k car but bought a $30k one instead or the 36” new TV that would have been just fine but the 60” one was more impressive.  I’d use that “blurry area” to justify some of my purchases. These things were “needed” in some way, so I would just define them as needs and not think about them critically.

But what happens when I step back from that for a moment and think about these things with a seriously critical eye?

Life, things I actually need…

Roof over head.  Does that mean I need a house as nice as the one we live in? Not really - we could make do with something much smaller and more affordable. Thus, quite honestly, probably half of our mortgage payment is a “need” and half of it is a “want.”

Food and water.  The majority of my food bill is a “need” - most of my purchases are simply covering staples and buying the basics of food for my family.

Clothing.  I’m extremely tight with my clothing. I often find myself shopping at discount stores to save a buck or two.  Even then, when I do buy clothes, I’ll still spend a little above the need.

Money.  Money is a necessary evil, without it we can’t sustain ourselves.  The question with money is how much do we need?  It’s fine to want more money but be careful not to put money ahead of things like family, friends, etc. 

Protection against demise.  For me life insurance and disability insurance are needs.  Be sure to have enough coverage here to allow for your family to get back on track should something catastrophic occur.

WANTS, everything else…

Part of my mortgage is a “want” because I want a big house. Some of my food bill is a “want” because I like to eat out. Cable (all the extras)?  Want.  Nice car?  Want.  Fancy cell phone?  Want. Wii, quads, boats (fun toys)?  Definitely wants. Traveling?  Want.  Other entertainment expenses?  Want. 

When you start looking at the small number of things in your life that are actually needs, you really begin to see how many things you buy simply because you want them, and then you start to realize just how much fat you can really cut.

What fun is life without wants?  It’s not…

The point isn’t to abandon all of the stuff you want, but to realize just how much of your monthly spending is tied to wants. It’s fine and healthy to want things, but if you’re sinking financially trying to maintain all of the things that you want, then there’s a real problem.

Recommended experiment.  Divide your spending into needs and wants.  Now for the challenge; before adding things up, make a deal with yourself that for every dollar you spend on a want you will put a dollar into savings for the future. Then add away...

If you are like me you just realized that the majority of your spending is on things that should be considered “wants”.  With the state of our economy I found myself needing to look at my wants with a more critical eye, eliminating some and putting others on hold for now.  Doing this has made big changes in my spending patterns each month, and has put some cash right back in my own pocket.

I hope this information was interesting and sparked some curiosity.  Having wants is a great thing and pushes us to reach further, work a little harder and simply dream but staying grounded also helps put everything into perspective…a need is a need and a want is just a want, nothing more!

If you have questions or would like additional information feel free to contact AmeriFree directly.  Our experts are available M-F 8am to 5pm MST to answer any questions regarding debt, budgeting, finances.

Matthew

Debt Blogger 

I understand that creating a monthly budget may not be easy but it is vital in keeping your finances in check.  However, unless you are willing to be as detailed as possible, creating a budget may not be as helpful in accounting for all of your monthly expenses.  If done properly the end result should be able to show where your money comes from, how much money there is and where it is all going…

Steps to Creating Your Budget:

1.   Gather all of your statements. Be sure to include bank statements, investment accounts, recent utility bills and any other source of income or expense.  The more information you can dig up the better.

2.   Record all sources of income. For those who are self-employed or have other sources of income be sure to record these as well.  Be sure to use your “net” income for creating your budget.

3.   Create a list of your expenses. List out all of the expected expenses for a given month. This includes mortgage/rent payments, car payments, auto insurance, groceries, utilities, entertainment, dry cleaning, auto insurance, retirement and college savings.  Basically include everything you spend money on.

(for more detailed budget add this step)

Break expenses into two categories: fixed and variable. Fixed expenses are those that stay relatively the same each month and are required parts of your way of living. They included expenses such as your mortgage or rent, car payments, cable and/or internet service, trash pickup, credit card payments and so on. These expenses for the most part are essential yet not likely to change in the budget.  Variable expenses are the type that will change from month to month and include items such as groceries, gasoline, entertainment, eating out and gifts to name a few. This category will be important when making adjustments.

4.   Total everything up. If your end result shows more income than expenses you are off to a good start.  If you are showing a higher expense column than income it means some changes will have to be made.

5.   Make adjustments where needed. If you have accurately identified and listed all of your expenses the goal would be to have your income and expense columns match up! 

For those who find themselves in the situation where expenses are higher than income, be sure to look at your variable expenses to identify areas where you may be able to reduce a specific expense.

6.   Constant review of your monthly budget. Now that you have a budget the most important part is to use it.  Most of us think we know where we are spending our money but trust me when I say that just is not the case.  For example, who actually accounts for that extra soda in a day, extra trip to the mall or just something that comes up?  The short answer is none of us…

Very few of us are experts in accounting for our daily, weekly or monthly spending.  Therefore, my goal in putting these somewhat simple steps together was that we, at a minimum, put one more second of thought when it comes to spending the last couple of bucks in the bottom of our wallets.  Feel free to contact AmeriFree if you want assistance with putting together your monthly budget.

I hope you found this information useful in planning your monthly budget.  Please check back often as new information is added daily.

Matthew

Debt Blogger