How to Effectively Manage Your Finances by Balancing Needs and Wants

Today, most people have a hard time distinguishing between their needs and wants. It is easy to confuse one for another, especially when you have strong emotions for something that in actuality is more of a luxury rather than a need. However, it can be hard managing your finances and income if you keep confusing your wants for your needs. In order to save more money, you must learn to stay within budget and avoid incurring unnecessary debts.

Here are some surefire ways on how to effectively manage your finances:

1. Create a simple and flexible budget.

The first step in managing your finances is to create a budget that will serve as your financial roadmap. Creating a budget will not only provide you with a clear idea of how much you are actually spending, it also helps you make a plan on how you can pay for all your expenses without incurring debt. In creating a budget, remember to make it simple and flexible, so it is easier to follow. On the other hand, you also need to ensure that it is flexible so you will not find it too difficult to adapt to small changes.

2. Categorize needs and wants.

To be able to balance your needs and wants, it is essential to distinguish which items classify as needs and which are wants. This is rather simple: needs are the things you should pay for, no matter what happens. They are necessities for your everyday living. These include food, shelter, utilities, transportation fees, and insurance. Meanwhile, wants are all the other things that do not qualify as needs: restaurant meals, concert tickets, movie tickets, cable television subscription, clothing apart from essential wear, accessories, and so forth.

3. Subtract your needs and wants from your income.

After computing all your needs and wants, subtract everything from your income. Make sure that your income includes all your sources, such as money from renting out a property, income from a store, income from your freelancing job, and income from a regular job. If after subtracting your expenses, you find that your total is zero, then rethink your wants list and scrap out or replace some items. Having very high expenses means that you are spending beyond your means, and your financial plan needs a serious overhaul.

4. Follow the 40-60 rule.

One way to assure that you have savings every payday is to follow the 60-40 rule. This means that you should allot 40% of your total income to your savings account, retirement fund, emergency fund, and investments such as mutual funds, stocks and bonds. The rest of the amount (60%) can go to all your expenses including your needs and wants. By prioritizing savings rather than allocating money for expenses first, you are sure that you can have extra money you can use in case of emergencies.

5. Allow yourself a luxury now and then.

If you spend your life setting aside a huge chunk of your income towards your savings account, you may feel guilty about spending your money on things you enjoy. This takes the joy out of spending our money on fun things that could make you happy. Actually allowing yourself to enjoy your hard-earned money (not all of it, though) motivates you to keep saving for a longer period of time.

Follow these ways of balancing your needs and wants in order to increase the amount of your savings and minimize risks for debts. If you want more saving tips, check out MoneyMax.ph, where you can get more useful insights on how to manage your personal finances in such a way that you are allowed to enjoy life once in a while.

Author Bio:
Cristina Beltran is a writer, blogger and online marketing specialist at MoneyMax.ph, Philippines’ leading financial comparison website.