It’s no secret that having kids comes with expenses–from the necessities, like groceries and education, to nonessentials, like vacations and toys. Many families struggle to keep their finances under control.
Creating a family budget is an important way to ensure you are spending wisely. However, how do you know how much money should go towards the essentials, and how much you can spend on the fun parts of family life? Here are some tips for balancing wants versus needs in your family budget.
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How to Distinguish Needs From Wants
Simply put, needs are essential to your well-being — shelter, food, clothes and utilities. On the other hand, wants are optional, like family vacations and new toys, but they can improve your quality of life.
Sometimes, telling essential and nonessential expenses apart can be challenging. What you need to live healthily, safely and comfortably and function productively in society differs from others.
Every family will have a unique set of wants and needs. Some parents may choose to invest in private school, while others may need to focus on paying off debts or saving for their children’s college fund. And at the end of the day, all parents want to be able to give their children a happy life, which might include vacations, holiday gifts, birthday parties and other treats.
To start your budgeting process, list all your regular expenses. Create two categories — one for things you can’t live without and another for nice but unnecessary items.
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How to Budget for Both Needs and Wants
Setting aside enough money for your needs and wants can be complicated. You may value them equally, but you shouldn’t split your income in half to afford both. Use these six tips to manage your finances wisely.
1. Set Financial Goals
Financial goals matter because they guide your decisions, keeping you from veering away from what you want to accomplish in life.
When you have kids, you face a lot of questions about how to give them the best life. Should you choose private or public school? Will you want to help your kids buy their first car or house? Do you want to travel or put them in inexpensive activities, like sports or music?
These questions give you an idea of what to ask yourself to define your short- and long-term financial goals. Once your objectives are clear, you can distinguish your needs from your wants, even if the line between them is sometimes blurry.
Opening a 529 plan can help your young ones pursue higher education without borrowing money. It will encourage you to set aside cash for investing that builds your children’s college fund. You’ll feel more motivated to stick to your monthly grocery budget and be mindful of needless expenses when your kids’ future is at stake.
2. Recognize the Overlap
Wants can sometimes masquerade as needs. Nicer versions of essential items are optional but unnecessary. For example, you may think name-brand products are higher quality than store-brand. Or maybe the latest iPhone will drastically improve your life, even though your current model still works.
There’s nothing wrong in wanting more than the bare minimum. However, more expensive doesn’t always equate to better quality. Understanding when an expense may be overkill is vital to avoid wasting your limited resources.
For instance, keeping a six-year-old minivan in good condition you own free and clear is a wiser financial decision than taking out a new auto loan to upgrade to a newer model. Similarly, maintaining your home properly–from furniture to windows or floors–can save you money from needing to upgrade or remodel after too much wear and tear.
When you save money in these smart ways, you can have a bit more to spend on things like vacations or holidays.
3. Differentiate Wants From Wishes
Big dreams can be strong motivations to strive harder and cultivate an abundance mindset. You must plan your budget with a dose of practicality. Only some things you consume have to be the most expensive your money can buy. Occasionally, treat yourself extravagantly when your pocketbook permits, but feel content with medium wants.
For example, Paris may be your ultimate dream vacation destination, but it may not be worth dipping into your savings to take the trip. You can make special memories with your family without overspending by choosing a city closer to home. Spending more won’t guarantee a better experience.
Mull Over the Trade-Offs
Buying one thing means choosing to part ways with your cash and not buy another. All decisions have consequences, so understand what you gain and lose whenever you pull the trigger on a purchase.
For example, getting fast food for dinner when you have several mouths to feed may save you money and time because it’s cheap and convenient. However, eating calorie-heavy and high-saturated fat foods frequently is damaging to the body and may inflate your family’s health care costs over the long term.
Have foresight. Some delay gratification and refrain from enjoying immediate rewards in exchange for indulging in more enduring pleasures later. Thinking through your financial decisions can be exhausting, but it’s worth the trouble to balance your needs and wants in your family budget.
5. Follow the 50/30/20 Budget Rule
The 50/30/20 Budget rule states that 50% of your income should go to your needs, 30% should cover your wants and 20% should pay down your debt and go into savings. The beauty of this budgeting concept is that it teaches you how to prioritize your living expenses and achieve financial freedom without denying your wants.
Rainy day and emergency funds are cash reserves for unexpected expenses — like phone replacement or unscheduled home repair. The former is for small, surprise bills, whereas the latter is for more considerable, unplanned costs and life-changing events, such as unemployment and divorce.
An insufficient rainy day or emergency fund may force you to over-rely on credit when you urgently need cash. Digging yourself deeper into debt eats up a more significant portion of your income, causing you to spend less on wants and give up some of your needs.
The ideal rainy day fund size is $500-$2,000. An adequate emergency fund should be as big as three to six months of living expenses. The more expensive your family’s needs are, the bigger your emergency fund should be. Keep both funds in a high-yield savings account so they increase in value over time and shield you against inflation.
Once you have enough rainy day and emergency funds, start investing conservatively in reliable dividend stocks to earn passive income while minimizing risks. Diverting your extra disposable income to your wants can result in a budget imbalance — a problem that may come back and bite you down the road.
6. Avoid Impulse Purchases
Impulse buying can jeopardize your budgeting efforts. Such behavior can cause you to slip up when obeying the 50/30/20 rule and disproportionately spend more on wants or needs. If you’re a coffee drinker, watch out for a higher tendency to make impulse buys when caffeine floods your bloodstream.
Shopping for stuffed animals your children don’t have yet or for more Lego sets releases dopamine, a feel-good hormone. However, the pleasure you experience from well-thought-out expenses outlasts the joys of impulse purchases because you’re less likely to feel guilty afterward when you plan things out.
Balance Your Wants and Needs
Having what we need helps us survive. Having what we want makes us feel happy and content. Both wants and needs should be reflected in your budget, but it can be challenging to determine which is more important. Plan your family budget using these tips to spend your money well.
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