Your monthly budget has all your expenses covered, including some spending money and funds set aside for emergencies. But that doesn’t cover your wants — from taking a big vacation to buying a new iPad, your “wants” budget can help you get more “nice to haves” in addition to your “need to haves.”
Understand Your Needs
To start figuring out how to get what you want, you need to know what you have to work with. Analyze your budget and calculate your total discretionary income by separating needs like housing payments and wants like traveling and entertainment. Here’s how:
- Figure out your total income (or gross income) by adding up all the money you receive, from your salary to cash gifts.
- After you subtract state and federal income and gift taxes, as well as any retirement contributions or health insurance payments through your employer, the remaining money is your net income.
- Mandatory expenses come out of your net income first — like rent, groceries and utility payments. You can take steps to lower your overall mandatory expenses, but no matter the total, those are your “needs.”
- The remaining funds after you pay for needs are your discretionary income, or your “wants” budget. People sometimes call this their “fun money” or “mad money.” It’s the money you can use for extras that go beyond basic needs.
It’s important to recognize that even within your needs, there are gray areas that can lean into the “wants” category. For example, while transportation is a need, buying a luxury vehicle like a Tesla is a want. Similarly, groceries are a need, but opting for premium brands or high-end items like filet mignon is actually a want. Recognizing these distinctions can help you strike a balance and free up funds for your other priorities.
Decide How Much You Want It
Wants come in different sizes and with different priorities. You might want a double-shot oat milk vanilla latte so badly that it feels like a daily need. But if your total monthly coffee budget doesn’t leave you any money to set aside for your dream vacation, you might have to make a choice about which you want more. There is no right or wrong when it comes to wants as long as you don’t overspend.
Big wants.Buying a home, taking a Caribbean cruise or purchasing a new sports car may sometimes feel out of reach. Determine your target date for your big wants, then calculate how much you need to put aside each month to get there.
Small wants. Little things can add up, but splurging is fine as long as you know how much you really have to spend. If treating yourself to coffee every morning is what you most look forward to, set enough discretionary income aside to do it.
A fund for all your wants. Keeping discretionary funds in a separate account can help you avoid budget overages and feelings of guilt when you do treat yourself. Consider setting up an automatic monthly transfer to put money aside for small and big wants to help you avoid accruing high-interest credit card debt.
Plan for Future Wants and Needs
Invest in your employer-sponsored retirement account and take advantage of any employer match to increase your funds even more with this “free money.” In addition, consider working with a Financial Professional to fit your wants into your financial plan. Your future self will thank you!