One of the most important parts of setting up a monthly budget is separating needs from wants. Before assigning dollar amounts to any categories, it’s important to know which parts of your monthly expenditures are an absolute need, and which items would be nice to include, but are not a necessity. Many people find this particularly challenging, and many even give up on budgeting when they can’t move past this step.
Fortunately, it doesn’t have to be this way. Below, we’ve outlined how to tell the difference between wants and needs, as well as how to separate these two categories on a monthly budget plan.
Defining needs and wants
Aneedis something that is necessary to live and function.
Awantis something that can improve your quality of life.
Using these criteria, a need includes food, clothing, shelter and medical care, while wants include everything else. However, as you’ll find when creating a budget, these terms are more fluid than they appear to be at first glance. While working through your lists, you may find that some items can fit into both categories, making the process confusing.
A good trick for dividing wants from needs is to let some time pass before fulfilling your desire for the item, either theoretically or practically. The desire to obtain a need only grows stronger as time passes, while the desire to fulfill a want will weaken with passing time.
Listing your needs and wants
Now that we’ve defined each of these budget categories, you can begin listing your own needs and wants.
Start with your needs, including the basics, like food, rent or mortgage, as well as other fixed expenditures that are necessary for you to live and function. Those things may include transportation costs, health insurance coverage and any clothing or tools you need for work.
It’s important to note that needs will vary from one person to another, and even for one person at different stages of life. For example, a family with two working parents who live in a community where there is no reliable public transportation may require two vehicles. Conversely, a family living in a city with several dependable transportation systems may list a second car as a want. Similarly, a four-bedroom home may be a need for a family while they’re raising several young children, but turn into a want later when the kids go off to college.
If you get stuck on a particular item and don’t know where to place it, hold it up to the following questions:
- Do I really need this item to live and function?
- Is it possible to fill this need in a less expensive way?
- How would my life be different if this item were not a part of it? When you’ve completed your list of needs, you can list all remaining expenses in your category of wants.
Reviewing and tweaking your lists
After completing this exercise, review your list of needs to see if anything can be removed. Will you still need these items a few years from now, or even a few months from now? Can any of your needs be swapped for a cheaper option? For example, you may need clothing, but do you need eight pairs of designer jeans?
Do the same for your list of wants. Which of them are only there because of pressure to keep up with others or look good? Which of your wants were more important to you in the past than they are today? Which are status symbols? Pare down your list until you’re only left with the wants that truly add value to your life.
Now that you know how to tell the difference between needs and wants, creating a monthly budget is simple. Assign dollar amounts to your fixed and non-fixed needs, set aside money for savings and use the rest to pay for your wants.
Going forward, you’ll likely also have an easier time keeping your impulse buys under control. Before purchasing an item, ask yourself if it’s a need or a want. If the item is a want, consider its importance and other wants you’ve recently bought before going ahead with the purchase.
Separating wants and needs can be one of the most challenging parts of creating a monthly budget. Follow the steps outlined above to learn how to make the distinction between these two spending categories with ease.
FAQs
She identifies the most common needs to be housing, transportation, insurance (automotive, home and medical), home utilities and food. Wants, on the other hand, are “expenses that help you live more comfortably,” according to Jespersen.
What is the difference between financial needs and wants? ›
Needs include food, housing, healthcare, and transportation—in other words, anything you really can't do without and maintain your health and security. Wants include items like entertainment, travel, designer clothing, and so on. If you can trim it from your budget, it's probably a want vs. a need.
What is the difference between need and want? ›
A need is something that is needed to survive. A want is something that an individual desires, but would be able to live without. A primary distinguishing feature of a need is that it is necessary to sustain life. Yes, there is an overlap of products being used for needs and wants.
How to categorize needs and wants? ›
Start by listing all your monthly expenses and categorizing them as needs or wants. Fixed expenses like rent or mortgage payments fall under needs, while variable expenses like dining out or shopping fall under wants.
How to decide if it's a need or want? ›
Needs are things that are necessary for survival — think food and shelter. Wants are things you decide to buy, but don't actually need — think subscription services and new clothes.
What are three examples of needs and wants? ›
Food, water, clothing, and shelter are all needs. If a human body does not have those things, the body cannot function and will die. Wants are things that a person would like to have but are not needed for survival. A want may include a toy, expensive shoes, or the most recent electronics.
Is a car payment a need or want? ›
A monthly auto loan payment typically falls into the “needs” category. If you're buying a car, it's most likely essential for getting to a job or taking the kids to school.
Are groceries a want or need? ›
Your rent or mortgage payment is absolutely a need, as are basic groceries, transportation to and from work, clothing and utilities like water and heat. Healthcare is also a need (though that, too, depends on your personal situation, and many young people skip health insurance or buy a cheap policy).
What is the 50 30 20 rule? ›
The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don't necessarily need.
How to figure out your wants and needs? ›
Making lists is a really great method of doing this. Present, short-term, and long-term wants and needs should be added to the list. Also, add what you are sure you do not want. This method will help you get clear about what you do and do not want out of your job, relationships, and life in general.
Our needs are the things we must have to sustain us day to day: food, shelter, clothing, personal care items, and in most cases safe, reliable transportation. Just about everything else can be classified as a want – entertainment, electronics, leisure travel … the list of things we want is potentially endless.
Is money is a need or want? ›
Human beings need money to pay for all the things that make your life possible, such as shelter, food, healthcare bills, and a good education. You don't necessarily need to be Bill Gates or have a lot of money to pay for these things, but you will need some money until the day you die.
How do you determine needs vs wants? ›
A want is an item that can improve your quality of life but isn't necessary to live. This category will vary from person to person, but common wants include getting drive-through coffee, streaming services, and travel. A need is something that is necessary to live and function.
What is the needs and wants rule? ›
The idea is to divide your income into three categories, spending 50% on needs, 30% on wants, and 20% on savings. Learn more about the 50/30/20 budget rule and if it's right for you.
What is identification of needs and wants? ›
• A need is something that is necessary and that you must have. A want is something that you desire or would like to have but can live without. Smart consumers always make sure their needs are met before they spend money on something they would simply like to have.
How do you tell whether they are needs or wants? ›
Defining needs and wants
A need is something that is necessary to live and function. A want is something that can improve your quality of life. Using these criteria, a need includes food, clothing, shelter and medical care, while wants include everything else.
How do you determine the needs and wants of the target? ›
Determining What Your Target Audience Wants and Needs
- How do you determine what your target audience wants and needs? ...
- Meet them on their own territory. ...
- Listen more than you speak. ...
- If you want to know something, ask. ...
- Ask yourself if you find what you are giving to others valuable to you. ...
- Conclusion.
If you're finding it difficult to identify your needs, try making a habit of checking-in with yourself several times in the day. Ask yourself, “what do I need, right now?” Normalise tuning into you and your needs. When you're trying to connect with your needs, it can help to tap into Wise Mind.
