Establishing a budget is the first step towards financial freedom. By accounting for every penny in and every cent out, you can determine how and where your money leaves your bank. Without a spending plan, you’re simply floating along, spending money each month and hoping you don’t overdraft.

Sitting down and finally plugging those monetary variables into your spreadsheet will feel so liberating the first time you do it. But what if you plug them all in and your ledger still isn’t balancing?

While we can’t make up for the accidents we had before we implemented a budget, we certainly can move forward with a clear mind of our needs versus wants. Sifting through what’s necessary and what we simply want is a difficult skill to learn but it’s well worth it for your money flow.

What are your necessities?

Housing, transportation, food and other basic living expenses need to be counted to the penny. This includes shampoo, toothpaste, medication, etc. Necessities are things you must buy regularly to maintain your ability to function at work, at home and in your personal endeavors.

But what about the things you like to have? Even though you might use the internet to play games, we are at a point in time where having access to the internet is a critical necessity for everyone. If it comes bundled with cable, then sure, that’s reasonable, but if cable is another $40 per month, even if it’s a deal with the company, is it necessary?

Ask yourself before each line in your budget if it’s something you could reasonably live without. If not, then it’s not a necessity and it can be considered to be left off the budget until you get a clearer understanding of your finances.

What is a want?

Anything else that you like to have in your life that isn’t required to live is a want. This might seem straightforward – is Netflix a need or want? It might seem like a want, but if that’s your only means of relaxation, you can probably find a way to fit it into your budget.

Are season tickets to your favorite sports team a need or a want? You might make the case that you’ve had them since you were a teenager and you’ve always gone, but if they’re $1000 and your budget is negative every month, they might need to go into the “want” pile for a while.

Understanding what you absolutely cannot live without is a lot easier than determining what extras can make the cut, but it’s crucial you learn this skill.

Putting it all to use

When you draw up your budget, you need to determine your needs first. Necessities are anything that you cannot go without paying – transportation and work-associated costs, hygiene products, medicine, food, housing, school-related fees, and other basics of daily life.

Wants are anything else; leisure items (to a certain extent since nobody can live a totally spartan life), luxury goods, expenses related to something you can easily do yourself (hiring a gardener versus mowing your own lawn, for instance). These are things that shouldn’t command control of your money until there is safe room to put them into the budget. Learning to value needs versus wants is a real skill and takes practice.

While it might seem like a budget confines your spending and makes life unfun, without out it, you have to suffer the consequences of unchecked spending. Being forced to stick to a budget is far better than being forced to deal with overdrafts, collections and debt.

Factoring Needs Verse Wants into a Spending Plan