Budget Rehab: Prioritize Your Purchases

Consider your needs, wants, and how to negotiate the difference.


People's budgeting efforts tend to go awry when they are unable to distinguish between their needs and their wants. Oftentimes, we lump as "needs" those very items that are actually wants; as a result, we can no longer work within our budget as they end up getting stretched to accommodate a lot of extras we may not really need. Understanding that you need a budget is not enough. You also need to understand how to make a budget that works. This goal will likely take some trimming and adjusting, along with a lot of discipline and tough love on yourself.

[See 12 Money Mistakes Almost Everybody Makes.]

While we definitely do not advocate doing away with all your "wants", we simply recommend that you set aside a much smaller portion of your budget for them. The conventional wisdom states that your needs should comprise 50 percent of your budget. To keep yourself sane, you may want to attribute 30% to your wants, and the remaining 20 percent should go to savings and debt repayment. For your savings, you may want to look into an online account like the HSBC Advance Savings Account, which offers relatively higher returns. Seems sensible, doesn't it?

Identifying Needs And Wants

The tricky part lies in correctly identifying your wants and sticking to the idea that they are a lower priority for you; sometimes, when you want something so badly, you may actually end up convincing yourself that you need it! And what happens if you've got something you need but you then decide to get a much pricier version of this item? This also does a number on your budget.

Take for example, clothes. Clothes are a basic need. When you feel like you need to buy this season's clothes even though last year's outfits still look good and aren't out of style yet, your needs have crossed over into wants. How many pieces of clothing do you really go through in a week or two? How about a month? A good measure of "enough" would probably be one change of clothes for every single day in a month. That would be 30 unique tops and 30 unique bottoms. And that's already being generous. If you feel that you need to have more, those items should actually be classified as wants.

In terms of food, if it's not part of the stash of goods you've set aside in case of emergencies, as long as you have enough to last you a few weeks' time, you probably shouldn't stockpile more. America's greatest financial problems are rooted in excess and instant gratification. We need to understand that we can actually survive without an overflowing supply of items—be it food, clothes, or other goods.

[See How Credit Card Companies Make Their Money.]

Ways To Cut Costs

There are other ways you can cut costs. If you have a cellular plan with minutes you cannot use up, consider downgrading. Monitor how many minutes and text messages you can use up in a month. Your phone may have text counters and call monitors that can help you keep track. Then when you've determined how many calls you've made and minutes you've consumed, have your company adjust your phone plan to the level that fits your usage patterns.

If you're going with a higher plan just to get a better phone, you might want to think twice about doing so, especially if you don't really use up all the allotted minutes and text messages. You may be paying through your nose and costing yourself hundreds of dollars just to be able to get a better phone for free. A lower plan might very well suit your needs better.

Lastly, as you figure out the things that bloat your budget, take a look at other ways you can save. Consider using online coupons like Buy.com promotion codes or look into using a cash back credit card such as the Chase Freedom credit card for your purchases. You may find that by using coupons, rewards cards and other such offers and products, you may be able to gather enough spare change to add to your emergency or retirement fund.

Silicon Valley Blogger is a full time blogger and online entrepreneur who writes for The Digerati Life and The Smarter Wallet sites that cover general topics ranging from investing and saving to credit and debt management.