Needs vs wants
Broadly, your spending can be placed in either of 2 categories:
- needs – for example, rent, mortgage and other debt repayments, food, utilities
- wants – for example, eating out, travel, subscriptions, new clothes
When making spending decisions it’s a good idea to keep these categories in mind. Accounting for your needs before wants can be a way to start cutting back your spending.
A useful guide is the 50-30-20 rule, which suggests aiming to spend 50% on living expenses (needs) and 30% on non-essentials (wants), such as eating out and shopping. That leaves 20% for savings or paying off debt.
It can also help to narrow down your spending a bit more. It’s up to you how you categorise, but these may be helpful ideas:
- rent or mortgage
- utility bills
- subscription services
- going out
Work out your average spending
Looking back over your statements for the last 3 months, add up the amount you’ve spent in each of the categories. You can then divide this amount by 3 to give you an idea of how much you’re spending in each category on average a month.
Tip: Try to factor in any irregular costs that may not have occurred within those 3 months, such as TV licence renewal, or car insurance.
Think about where to make changes
Are you comfortable with these average amounts? Are you spending too much on the weekend and having to scrimp during the week? Could you be saving more if you cut back in certain areas?
If you’re overspending, you may have to weigh up whether you can cut back on some of your wants.
If you’re looking to reduce your spending on needs, you may find that cutting back on some things is easier than others. For example, it will likely be easier to spend less at the supermarket than reduce your rent or mortgage.
But that doesn’t mean you can’t make plans to reduce some of your larger costs over time if you feel you need to. Look at things like your energy, phone and broadband bills to make sure you’ve got a competitive deal. If you don’t, it may be worth switching to another provider. We have tips on switching supplier in our article on how to save money on energy.