Sound management of your finances can allow you to both achieve your financial goals and build resilience against economic uncertainty. Understanding strategies that can help you effectively manage your finances is a key component of your financial well-being.

In this blog series, we outline strategies to help you get started on the road to good financial health. For our second post in this series, we look at how you can plan a budget that balances your needs and wants.

What is the difference between a need and a want?

According to the Financial Consumer Agency of Canada (FCAC), planning out a budget is an important component of effective money management because it can help you guide your spending and grow your savings. And the first step to creating a smart budget is having a clear understanding of the difference between your needs and wants.

The FCAC defines a need as something that is a necessity and “essential for life.” This includes things such as housing, food, clothes and medication. Meanwhile, a want is a desire that isn’t essential, such as a gym membership, vacations and subscriptions to streaming services.

Once you have a general idea of how your expenses can fall under these two categories, you can start crafting a budget that takes both into account. Below, we look at how you can get started.  

1. Categorize your spending.

When planning your budget, it’s a good idea to start by looking over expenses across the last couple of months and categorizing items as either a need or a want.

Keep in mind that the line dividing a need and a want can sometimes be a little fuzzy and may even overlap. For instance, while a car may be a need for people who require it to go to work, buying an expensive sports car for the same purpose could be more of a want.

In this light, it pays to be objective when categorizing your needs and wants. One way to do this is by asking yourself if each item on your expense list serves a basic and essential purpose and how your life will be impacted if you don’t buy it.

2. Consider using the 50/30/20 budget.

While there are many ways you can plan your budget, one popular method is the 50/30/20 rule. This budget divides your after-tax income into three categories: 50% for needs, 30% for wants and 20% for savings or debt repayment.

Whether or not you decide to follow this ratio, one useful online tool to help you plan out a budget is FCAC’s budget planner, which gives you helpful suggestions as you craft your budget and allows you to save it online for future reference.

3. Review your budget to see where you can streamline costs.

One of the great benefits of having a budget is being able to see where you can reduce your expenses. For instance, you might be able to identify a monthly subscription to video streaming services you barely use or see how much that morning habit of buying coffee at a pricey café is costing you every month. Once you know where you can streamline your costs, you’ll be able to achieve your financial goals faster.

With the right strategies, you can plan an effective budget that balances your needs and wants to help you reach your financial goals. And pairing your budget with a good cash back credit card can help you get more out of your everyday spending, making your money work harder for you.

For instance, the Home Trust Preferred Visa has no annual fee and offers 1% CashBack Rewards on all eligible purchases with no cap, even when shopping online. Learn more by visiting hometrust.ca/credit-cards/preferred-visa-card.

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