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Learning how to track income and expenses to ensure financial health.
Why do some people with six-figure salaries live paycheck to paycheck, while others with modest incomes build massive wealth? The secret isn't a math degree—it's a system.
In economics, the first step to financial health is distinguishing between Needs and Wants. A Need is an essential expense required for survival or basic functioning, such as housing, basic groceries, and transportation to work. A Want is a 'discretionary' expense—something that improves your quality of life but isn't strictly necessary, like a streaming subscription or dining out. In a consumer economy, marketing often tries to blur these lines, making us feel like a want (the latest smartphone) is actually a need. Mastering your budget requires the discipline to look at an expense and ask: 'Will I be safe and employed without this?'
Imagine you are at the store with 15). These are Needs. 2. You see a limited-edition soda and a bag of gourmet truffles (12 as a want, you realize you have 23.
Quick Check
If you pay for a high-speed internet plan because you work from home, is that a need or a want?
Answer
It is a Need, as it is required for your employment and income generation.
Once you identify needs and wants, you must categorize them by how they occur. Fixed Expenses are costs that remain the same every month, like rent or a car payment. Variable Expenses change based on usage, such as your electricity bill or grocery spending. Finally, Discretionary Spending is the money you choose to spend on non-essentials. Understanding these categories helps you predict your 'burn rate'—the total amount of money leaving your account each month. If your fixed expenses are too high, you have less 'wiggle room' when emergencies happen.
$$800 + 120 + 150 = $1,070$$
Quick Check
Which type of expense is easiest to cut quickly if you lose your job?
Answer
Discretionary spending, because these are non-essential 'wants' that are not tied to contracts or survival.
The 50/30/20 Rule is a simple formula to ensure financial balance. It suggests allocating your after-tax income as follows: - 50% to Needs: Housing, utilities, groceries. - 30% to Wants: Hobbies, vacations, dining out. - 20% to Savings and Debt Repayment: Emergency funds, retirement, or paying off credit cards.
By following this ratio, you ensure that you are living within your means while simultaneously building wealth for the future. If your needs exceed , you may need to downsize your lifestyle or find ways to increase your income.
Jordan earns 3,000 \times 0.50 = 2. Wants (30%): 9003,000 \times 0.20 = If Jordan's rent is 100 from the 'Wants' category to cover it.
If your monthly take-home pay is $4,000, how much should you ideally put toward savings using the 50/30/20 rule?
Which of the following is considered a 'Fixed Expense'?
The 50/30/20 rule should be calculated based on your gross income (before taxes).
Review Tomorrow
In 24 hours, try to recall the three percentages of the 50/30/20 rule and what each category represents.
Practice Activity
Look at your own spending from the last week. Categorize each purchase as a Need, a Want, or Savings/Debt.