When you have competing demands for your money it can be hard to make good decisions about what to buy and how to spend. You may find it helps to put your expenses into Needs, Wants and Savings or Reducing debts.
These are the unavoidable costs that help to keep you and your loved ones safe, warm and fed. They include your mortgage or rent, food shopping, utilities, transport, as well as minimum payments on loans and borrowing. Remember to include any tax you owe, unless it has already been deducted from your salary by your employer.
These are all the things you spend money on that are not absolutely essential. They include meals out, going to the cinema, new clothes, gym membership, holidays and concert tickets.
Savings might be for emergencies, short-term goals (like a holiday) or longer-term plans (such as retirement). Debts include any debt repayments you make each month, in addition to any minimum payment requirement.
When you make decisions that involve spending it’s a good idea to keep these 3 categories in mind. If you notice that you are spending too much in any single category, it could be an indicator that you need to adjust your spending habits.
In her book, All Your Worth: The Ultimate Lifetime Money Plan, Harvard bankruptcy expert Elizabeth Warren defined the "50/30/20 rule" for spending and saving. The principle is that you aim to spend 50% of your income after tax on needs, 30% on wants and 20% on savings and debts each month.
