Congratulations on accepting that you need a spending plan to take control of your finances. It’s a defining moment in your journey toward financial freedom.
Now let’s dive into the 04 types of spending that you’ll need to include in your spending plan before you start looking at each individual item.
Understanding each type of spending will help you:
- get an overview of your spending,
- quickly adjust your spending plan when needed
- allow you to do simple financial health checks periodically
So let’s get into it. There are four main types of spending – needs, wants, savings and giving.
Needs
Needs are the bare minimum you need to spend to survive. This isn’t where you put your weekly hair cut or visits to the nail spa.
Imagine you’ve lost your job and you need to use your emergency fund to tie you over until the next position came along.
On your list of expenses should be only five items:
- Housing
- Transportation
- Utilities
- Food
- Work/school clothes
At a minimum you’d need somewhere to live, a way to get to and from work, keep the lights on, eat (pretty essential) and have clothes for work and/or school.
Once you get a job, you would start to fund other categories of spending.
Simple Financial Health Check Steps
Wants
The Wants category of spending is the most fun. It includes the bulk of the items in your spending plan. However, you can break Wants down a bit further to identify which of your Wants are priorities.
Think back to our imaginary job loss scenario. Let’s say instead of finding a job that replaced your previous income fully, you got a temporary job, just to give your emergency fund a bit of a break.
That’s when you’d add in your priority spending – the Wants that are important to your mental, emotional, spiritual and physical wellbeing and quality of life.
Examples of priorities could be giving (more on this later), a regular massage, fitness, vitamins, grooming, a small entertainment budget, etc.
Though all of these are technically wants, identifying them gives you an easy plan for prioritising your wellbeing in a very stressful time, like getting a reduction in your income.
All the rest of your wants would be added into your spending plan once you had enough money to fund them.
Savings
The Savings category is a bit of a misnomer. Ditch the image of Scrooge McDuck and his pile of money sitting in a vault. That’s not what we’re talking about here.
The job of your Savings is to minimise risk, pay off debt and build wealth through investments – what we like to call your seed capital.
Here’s a quick list of what your Savings should go toward:
- Emergency fund (03-06 months of Needs spending)
- Paying off all short-term debt
- Paying down your mortgage in 10 years or less
- Investing in property and landlord expenses
- Investing in the share markets (stocks, mutual funds, etc)
Remember, in order to reach mortgage and financial freedom, your Savings need to be doing more than sitting in a bank account accruing minimal interest.
Giving
If you’ve read about the Wants category above, you might be wondering why Giving is included as a priority Want and as a separate category of spending.
It’s because where you add Giving as a type of spending is up to you.
At Futurebound we include it as a separate type of spending because it helps you to live a life of fulfilment, which is what we’re all about.
Helping others, donating to a cause, and making a difference in your community and world are major motivators for financial freedom, so it should be a part of what you do from the start of your journey.
Giving includes tithing, donations, child sponsorship, random acts of kindness, etc. Don’t include birthday, anniversary, or other gifts for special occasions in this category. Though they are nice, these items are Wants.
In the unfortunate event you lost your job, you could chose to start allocating money to Giving when you start spending on your priority Wants or when you add the rest of your Wants to your spending plan.
How much should each type of spending be
Use these percentages as guidelines for how much of your spending plan should be included in each category of spending.
If you still have a mortgage and car loans and you’re just starting your journey to financial freedom:
Needs – 50%
Wants – 30%
Savings – 10%
Giving – 10%
Once you’ve paid down your mortgage and car loans, it might change to:
Needs – 30%
Wants – 30%
Savings – 25%
Giving – 15%
A balanced approach to wealth building might be:
Needs – 20%
Wants – 30%
Savings – 40%
Giving – 10%
A “lean and keen” approach to wealth building might be:
Needs – 20%
Wants – 10%
Savings – 60%
Giving – 10%
Warnings
Though it’s your spending plan and you need to create it based on your financial goals, here are some warnings to consider:
- Spending more than 50% of your income on your Needs puts you in danger of not having enough for building wealth and Giving.
- Once you’ve paid off your mortgage and car loans, you’ll be tempted to increase your Wants. This is not recommended unless you use it to pay off short-term debt and then allocate the increase to your Savings.
- Property Investors – If you include the money you’re putting towards your rental property or property investments in your Needs or Wants, the guidelines above don’t work. To use the guidelines above, include this spending in your Savings category.
Now that you understand the 04 types of spending, you’re ready to do a simple financial health check and identify any red flags.
Keep in mind this article is providing general information and not individual financial advice.
If you’d like a review of your situation and customized advice for building wealth to reach financial freedom and live a fulfilling life, please book a free 15-min chat.
