Creating a budget or spending plan is an essential part of money management. Once needs and wants have been separated and prioritized, it will be simple to see where money is going and where expenses can be cut.

In general, needs are things that keep people sheltered, fed, able to get to work, and protected against emergencies. For most people, needs include:

*Health insurance. Every household should make an effort to purchase at least catastrophic health insurance to protect them against the financial calamity that would result from even a moderate accident.

*Savings. Those who do not work for an employer that provides a pension need to save for their retirement. Even a small amount invested periodically will gain value over time. Emergency savings in case of a loss of income should also be a high priority.

*Rent/mortgage. This is the largest expense in most households.

*Transportation expenses. Whether this includes a car payment, insurance, gas money and money for maintenance, or money for a monthly public transit pass, nearly everyone needs to spend money to get to and from work.

*Basic utilities. These typically include water, electricity, heat, and in some areas, air conditioning.

*Food. Every household has different preferences, but the needs include whole grains, fresh or frozen produce, basic pantry items (rice, beans, pasta), and limited dairy and meat.

*Basic clothing. This should include a work-appropriate wardrobe and some casual clothes. Once a wardrobe is established, the only need is to replace items as they wear out.

*Other utilities and services. Very few other utilities and services are needs. One need may be a pest control or termite control service in areas where termites and other pests can damage homes.

Of course, every household will also spend money on entertainment and other wants, including vacations, memberships, and eating in restaurants. In order to create a realistic spending plan, track normal spending in the needs categories and in the wants categories. Hopefully, take-home income will exceed typical expenses. If this is not the case, changes will need to be made.

The easiest way to increase take-home pay is have less tax withheld. Tax withholding should be based on total household income; if this income has decreased recently, a lower withholding is permitted. The next priority should be to cut expenses on non-necessities. If that is not enough, income should be increased or necessities should be scaled back.

A budget is an indication of household needs and priorities. Spending time tracking expenses and separating wants from needs will allow all members of the household to have input on changes to household spending that may be needed to bring total spending in line with income.

Learn more about this author, Erin Doherty.
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