"Needs-based” is a description a lot of companies use to explain their efforts to give people what they need. It is not uncommon to see “need-based” in front of words like training, service, pricing, treatment, design, and selling. I am a fan of the needs-based concept. After all, every person is unique and one size does not fit all; this is particularly true for budgets.
I realize that it would be easier for consumers if there was only one budget formula. For this reason, many experts have developed sample spending plans for consumers to try and follow. For example, here is one commonly suggested way to allocate your spending:
While this budget may provide a good general guideline, I find that it is hardly ever realistic—there are just too many variables. For example, what if you reside in a city with a high cost of living? What if you are sick or injured? What if you have teenagers to feed? These variables are your reality and are the reason needs-based budgeting makes sense. However, needs-based budgeting is still not quite realistic enough. Try taking the needs-based idea even one step further by also planning for the things you want.
Here’s how to create a simple wants and needs-based budget:
1. Determine the amount of money you have available each month. If you have a variable income, use an average. (Click here for an income worksheet.)
2. Identify the costs of your needs. These are expenses that must be met. They should include costs for things like housing, food, healthcare, debt obligations, transportation, and savings. Do not forget to set money aside each month necessary periodic expenses, like auto registrations and taxes. Subtract these costs from your total monthly income. (Not sure where to start? Click here for a financial priorities worksheet.)
3. Identify the costs of your wants. I put costs for things like TiVo, donations to charity, and dinners out in this category. Subtract these costs from what’s left of your total monthly income.
4. Stop. Do you have a little money left for the vague, but necessary miscellaneous category? If not, you need to revisit step 3 and make some tough decisions. If reworking step 3 isn’t enough, you will have to revisit step 2 and make some really tough decisions—perhaps seeking help from a professional. If you have a lot of money left, consider using some of it to pay down debt or increase your savings.
5. To satisfy your curiosity, create your own pie chart. Here is my personal pie chart:
Am I worried that my chart doesn’t look like the sample spending plan? Not one bit. This works for me because it is based on my needs (and more than a few wants!)
For more in-depth budgeting information, attend one of MMI's free Webinars .