Beyond Budgets: Navigating the Terrain of Essential and Enriching Expenses
Embark on a financial odyssey as we dissect the intricacies of spending—talking about the essentials that sustain us and the choices that color our lives.
Navigating the intricate world of finance often begins with distinguishing between wants and needs—a fundamental framework to guide our daily decisions. As we delve deeper into the realm of finance, the shades of gray start to fade, and we encounter the stark contrast between discretionary and non-discretionary spending.
When we break down our overall household spending, we identify "non-discretionary" purchases—essentials vital for survival—and "discretionary" purchases that enhance our lives. Most of us live by the daily decisions of want versus needs, but this approach settles things more black and white. Yet, as always, there exists a gray area, where some expenses are considered non-discretionary by some and discretionary by others.
The principles of wants versus needs can be applied to each spending decision, whether discretionary or non-discretionary. Let's explore some common examples:
Most Common Non-Discretionary Purchases:
Mortgage/Rent payment
Utilities
Food
Auto loan, maintenance, fares
Health, Auto, Home, Life Insurance
Taxes
Education Expenses
Child Care
Most Common Non-Discretionary/Discretionary Purchases:
Charitable Contribution
Church Donations
Most Common Discretionary Purchases:
Entertainment
Vacations
Subscription Services
Services
These examples showcase our daily financial choices—what we must spend money on versus what we want to spend money on. Notably, being labeled as non-discretionary doesn't imply a free pass for extravagant spending. This is where the wants versus needs discussion comes into play.
Consider the housing expense guideline I encountered while studying for the CFP certification exam—28% of net pay. This encompassed rent/mortgage, property taxes, and insurance. A revelation, especially considering many spend significantly more on housing. Another eye-opener was the guideline suggesting 36% of take-home pay for total household debt, including mortgages, car loans, and credit card payments. A thought-provoking metric, indeed!
These figures might be startling, but they provide guidance. Imagine a life where housing and debt ratios align with suggested benchmarks. These reflections prompt us to evaluate and potentially alter our spending patterns. It's crucial to acknowledge that these are general guidelines, and personal financial situations vary. Individuals should consider their unique circumstances, financial goals, and local cost of living when determining budget allocations.
Ultimately, this post aims to spark contemplation about a potential future—one where your assets work for you, and you don't get your assets kicked!
ACTIONABLE ITEM: LOOK OVER YOUR SPENDING TO GET AN IDEA WHERE YOUR MONEY IS BEING SPENT.