Needs vs Wants

It is not uncommon to feel restricted when budgeting, especially if you are controlling your spending across multiple categories. However, there is a simpler solution called proportional budgeting, where you divide your monthly income into categories based on a percentage:

  1. Allocate a percentage to your needs – things that are essential
  2. Allocate a percentage to your wants – things you choose to buy, but can survive without
  3. Allocate the remainder to savings – the amount you put aside for your future

A popular example, using the Harvard Economist’s, Elizabeth Warren’s 50-30-20 rule of thumb.

She proposes the following allocation of your after-tax income:

  1. Limit your needs to 50% of your income
  • This should include groceries, housing, utilities and transport.
  • This amount should be no more than 50% of your total after-tax income.
  1. Limit your wants to 30% of your income
  • These items should include things you want, such as a beautiful shoe, DSTV, your gym contract and even your home internet.
  • It should be notes that any discretionary spending that you could forego with only minor inconvenience is a want.
  1. Spend at least 20% of your income on savings and debt repayments
  • Spend at least 20% of your after-tax income repaying debts and saving money in your emergency fund or for retirement.
  • If you have credit or retail cards, the minimum payment is a “need” which counts towards the 50%.
  • Anything over that is an additional debt repayment, which qualifies towards this 20%.
  • The same logic applies if you have a bond or a vehicle loan, the minimum payment is a “need” and extra payments count toward your “savings and debt repayment.”

The 50-30-20 Rule of Thumb makes total sense and it might work for you. However, a simpler method is to follow the 80-20 rule. This is spend at least 20% of your income on savings and debt repayments. The point is, that if you can control 80-20, why not try 70-30? This is when you will realize that budgeting is not about restricting yourself. Budgeting is the art of aligning your spending with your values.

Need help with budgeting?

Our Financial Experts have been unpacking and providing practical advice on the best ways to preserve YOUR financial freedom. Contact our Financial Advisors to ensure that you are receiving Shariah-Compliant Finance advice.

Anglowealth is an Authorized Financial Service Provider (FSP Number: 46755)

 

Scroll to top