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Needs and Wants for Your Personal Budget
In today's world, it can be easy to get caught up in the cycle of consumerism and accumulate a bunch of things we don't necessarily need. It's important to differentiate between our needs and wants, as they can significantly impact our financial well-being and overall quality of life.
In this article, we'll explore the difference between needs and wants and provide tips on how to balance them in your personal budget.
What are “need” expenses?
A need is an expense that is essential for survival and basic well-being. These expenses include necessities like housing, food, transportation, utilities, and healthcare. Failing to meet these types of expenses can result in serious consequences, such as financial hardship or health problems.
What are “want” expenses?
A want is an expense that is desirable but not crucial for survival or basic well-being. These expenses include non-essential items like entertainment, dining out, vacations, and luxury goods. Wants can be postponed or eliminated without significantly impacting a person's quality of life.
Of course, some would argue that "want" purchases are worth the cost, and this might be true as long as those purchases fit into a balanced budget. The trouble comes when unnecessary expenses have you spending more than you can afford. Then it's time to trim the fat — focus on the essentials and buy "wants" as funds become available.
How to distinguish a need from a want?
It's important to distinguish between needs and wants regarding personal budgeting and financial planning to prioritize purchases and avoid overspending on non-essential items.
To help distinguish between needs and wants, we spoke to personal finance expert Josh Hastings:
"Needs have changed and can include access to transportation, internet, and even cell phones," Hastings said.
However, he raised an important question: "Is the newest iPhone a want, or is it a need?"
The latest anything probably isn't a need. Be discerning in how you choose to define your needs.
According to Hastings, the first rule in determining if something is a need or a want is to consider the present value of an item versus its future value.
"A $10 gadget from the store could be worth $80 in 30 years," he said.
Hastings added three other questions to consider:
- Does it meet a basic need like food or safety?
- Will it be something you need in five years, or would you rather save the money?
- Does the item make you happy, and will it continue to do so?
If you need clarification on whether a purchase is a need or a want, ask yourself these three questions. Sit on it for a few days.
Another trick is this: If you're unsure whether you can live without a particular “want” item, do it anyway, to see what it's like. Give it a couple of weeks or maybe a month. If you really do miss it and can’t live without it, bring it back into your life and look for something else to cut.
Below are examples that may help you distinguish between your own needs and wants.
|Transportation (e.g., a reliable car)||Luxury car|
|Clothing (e.g., basic clothing items)||Designer clothes|
|Communication (e.g., a basic cell phone)||High-end electronics|
|Shelter (e.g., a place to live)||Travel|
|Food (e.g., basic nutrition)||Fine dining|
How to incorporate needs and wants into your budget
Needs and wants help you balance your budget. They help you cut expenses without cutting out the things you need. And fortunately, the concept isn't hard to understand — it just requires a little practice.
Our needs and wants worksheet will guide you through the process of distinguishing between essential and non-essential expenses — needs and wants. They'll help you identify purchases that drain your wallet and find opportunities to increase your savings.
Complete the needs and wants budget worksheet in the following steps:
- Separate needs from wants
Think back to the past month and categorize your major expenses. Add them to the worksheet as either “Needs” or “Wants” where possible.
- Find ways to cut expenses
Look at each expense category and think about ways to cut costs. Do this for both needs and wants. Keep in mind that even “need” costs can be reduced. For instance, food is needed, but you can cut costs at the grocery store by avoiding name-brand products. How much can you cut? Write down the new cost for each expense in the “Frugal Cost” column.
Be sure to set limits on your wants so that you have enough money for the necessities.
- Add up your total expenses
Add up your need and want expenses as well as your frugal costs. Write down the total for each in the "Totals" row.
- Determine your budget
Reflect on how you spend your money. Do you spend more on needs or wants? How well-balanced are your expenses? One popular budgeting method is the 50/30/20 rule, which suggests allocating 50% of your income toward needs, 30% toward wants, and 20% toward savings and debt repayment. Following this budgeting method could help you plan a more balanced budget.
Use the worksheet insights and your judgment to create a financially stable budget.
- Revisit your budget regularly
Adjust your budget as needed to account for changes in your needs and wants. For example, if you get a raise, you may want to allocate more funds to your wants or savings. Similarly, consider lowering your allocated budget for wants if your rent is increased.
It's important to budget carefully and to regularly re-evaluate your expenses to make sure you're covering your basic needs, while also keeping a handle on discretionary spending.
Josh Hastings is a former high school athletic director at the secondary level who shifted his focus in 2016 to focus more effort on his entrepreneur endeavors. In 2017 he founded MoneyLifeWax.com, a personal finance site dedicated to helping millennials with student loans. With an emphasis on money and finance behavior, Josh started Money Life Wax to help millennials realize there are other ways to make money and be happy in the 21st century. You can find him on Facebook at @moneylifewax.