Managing money is often a struggle because a lot of us don’t really know how to balance what we need with what we want. This is where the 50-30-20 rule comes in. It is a simple concept that splits income into three sections: 50% for needs, 30% for wants and 20% for saving or getting rid of debt. While this seems like a simple enough plan, it is not the case since it is often difficult to distinguish between what a need is and what a want is.
A need is defined as something necessary for living, to be functional, food, shelter, transport, health provisions, training/education etc. A want seems to refer more to comfort factors, life style choices, and the preferences of the individual. Wants might include such things as getting the latest model of mobile phone available, dining in fine establishments, or purchasing clothes of a designer label.
Need and want becomes confused when want is seen to be need, and thus required. For instance, many people purchase brand new smart phones every calender year, even when the old one is functioning well and giving just as good service. At the time it will appear that the new model is required and is therefore a 'need' when in fact it is a 'want' disguised as a ‘need’ .
The danger of this mix is that is creates financial pressure. With more income disappearing into ‘want’, it follows that there is far less for real ‘need’ factors and security for the time to be. People also endeavour to stretch their financial resources in order to keep up to a lifestyle that they consider that they ‘must’ have, when the very things that matter, things such as building an emergency fund, paying all insurance premiums, and saving for a retirement, are ignored.
The advantages in the long haul of recognising need as first preference will always outweigh the short term satisfaction of the want. The secret of the balance lies here. Wants are not bad. They are in fact necessary for our enjoyment of life. However, when want is placed in the priority favourable to the recognition of needs, we run the risk of losing sight of the things that are needful and which have a very pronounced effect on future stability.
For instance, to take one simple example, instead of the yearly upgrading of the mobile phone, the same dollars spent in saving, or training, or self education, would have far greater benefits in realising results in the long term than the temporary thrill of being able to possess the latest gadget. The point of the 50-30-20 rule is not to enforce something unduly but to be aware of things in relation to them.
By knowing the things which are needs from those that are wants we can see them in better perspective, and in perspective we can have control. When we are aware of what is really important, there is a better tendency to make rational decisions on the financial side of life, decisions that place us in secure position, less on edge, and more prepared for what is to come. After all, really, it is not the wants that we forget about that hurt us. It is the needs that are neglected that are the main things that cost us more in the end.