Part Two: Needs versus wants, savings, and your sanity.
Commercials follow you throughout the day via literal channels and subliminal ones. So, when it comes to spending and budgeting, we have to constantly remind ourselves of the difference between needs and wants. Needs are essential to survival, like shelter and sustenance, health, including insurance and a phone for emergencies, and employment, such as day care and transportation. Everything else is a want. Everything.
Here’s a list of typical American wants often confused for needs:
- Car payments – You don’t need power anything, or even a car built in the last decade to get from point A to point B. A well maintained $2,000 beater will get you to work. Or, go green and walk, bike or take public transportation.
- Smart phones – A phone for emergencies is a need. A data plan for Pokemon Go, a want.
- Cable TV and the internet – Sink a few dollars into an antenna or streaming device and cut the cord on cable.
- A gym membership – Fitness buff? Take up running or start a CrossFit co-op.
- Going out and eating out – Cooking at home and drinking at home are cheaper and healthier. And you’ll wake up with less regret the next day.
- Non-essential self-care – Save by skipping the salon and spa.
- Vacations – Hopefully this one is obvious. In later posts, we’ll talk travel hacks and how to circle the globe by spending points and miles, instead of money.
- Recreational shopping – It doesn’t have to be basic, but a basic wardrobe is all you need.
In part one of this series we started building your budget by listing your needs and what you’re spending on them. And if you’re in the negative or breaking even, we identified ways you can hustle to find more money. Once you’ve found a little extra green, it’s time to add that into the budget. But before you create a line item for a weekly mani-pedi or other wants, let’s talk about two things: debt and savings.
In your twenties and thirties, you should be saving even while you’re paying off debt. Take advantage of compounding interest by investing as early in your career as possible, even while you’re working to meet other financial goals. If your employer offers a 401k match, start by contributing the amount needed to get the match. An employer matched 401k is a straight-up middle class hustle. Don’t leave that free money on the table.
If you start investing at 25 contributing $250 a month, with compounding interest you’ll end up with roughly the same amount at 65 (around $400,000 considering a modest interest rate compounded quarterly), as you would if you started at 35 contributing $500 a month. If you delay saving for retirement until 45, you’d have to put in $1,000 a month to end up with $400,000 at 65. Check out this link to do your own money math.
If you have nothing saved for emergencies, that should be your next priority. Aim to set aside at least $1,000. Once you have $1,000, think about your situation. Are you single or a one-income family? Is your job unstable or are you in an industry prone to layoffs? Is your monthly income variable? If your answer any of these questions is yes, keep building up your emergency fund, to amount equal to three months of essential expenses.
Once you’ve automated your match-qualifying 401k contribution and set aside savings for emergencies, it’s time to address the interest you’re spending instead of making. I like my money to work as hard as it can, so I recommend the avalanche method – paying off your highest interest rate debt first and saving any tax deductible debt for last. The faster you can pay off debt, the less interest you will ultimately pay and the quicker you can begin working toward achieving your other financial goals.
Fortunately, we both ditched car payments and credit card debt in our single days. But when Ryan and I got married three years ago, we had a combined $85,000 in student loans. Already thriftier than the average Starbucks-consuming suburbanites (no way I’ll pay $5 for my daily cup of Joe), we did the math and discovered the amount of interest we were paying could buy us both the fanciest of lattes and the flakiest of pastry every. single. day. So we decided to take charge of our debt and dedicating a big chunk of our budget to pay it off as quickly as possible.
Let’s be realistic, you’ll also need to add a few wants to your money-saving, debt-busting budget in order for it to be sustainable. I promise you can find endless entertainment and a truer sense of satisfaction in things that are free (we like volunteering and going on nightly walks after work). But a line item for one date-night a month, a gym membership or Birchbox subscription can help keep you motivated and on track.
Next in the series: Putting it all together on paper.