One of the most challenging—but also most important—aspects of creating your budget is differentiating between needs and wants. While both ought to have a place in your budget, needs should be prioritized over wants.
How can you differentiate needs from wants? The line between the two can be blurry, and it’s made even more confusing by the fact that what’s classified as a need versus a want isn’t the same for everyone.
Knowing the difference between wants and needs can make it easier to create and stick to your budget. Keep reading to learn how.
Key Takeaways
- Both needs (essentials) and wants (nonessentials) should have a place in your budget, although not everyone’s lists will be the same.
- Housing, utilities, food, health care, and transportation are usually considered needs; dining out, entertainment, streaming services, and gym memberships are common examples of wants.
- A useful allocation system for wants and needs is the 50/30/20 budget rule, which says that 50% of your budget should go to covering needs, 30% to wants, and 20% to saving and debt.
- Another method, known as reverse budgeting, or “paying yourself first,” involves determining needs first, then setting aside savings and debt payments, and devoting what remains to your wants.
Needs vs. Wants
Needs are those items in your budget that are necessary for your health and well-being (whether that be physical, emotional, mental, or financial). If you stopped spending money on these items, there would be severe negative consequences.
Wants, on the other hand, are those items that may improve your quality of life but aren’t entirely necessary. Cutting these items out of your budget might be uncomfortable, but in the end, you could easily survive without them.
There are certainly some gray areas when differentiating between needs and wants. After all, we can all agree that food is a need. But buying food can translate into spending $150 for a week’s worth of groceries or spending $150 on a meal at a nice restaurant. In most cases, the grocery shop is a need but the restaurant meal is a want.
Some comparisons are quite a bit more ambiguous. For example, what if it’s important to you to buy organic food? Does the money you spend on more expensive organic groceries count as a need as much as the money you could spend on a cheaper option? Or, if a gym membership is important to your well-being, that may be considered a need for you.
When the distinction becomes less clear, it’s up to each individual to decide for themselves what a want is versus a need.
Examples of Needs
Your needs are the most important line items in your budget. They’re the ones that, even at a time when you’re financially struggling, you must find a way to fit into your budget. Here are some examples:
- Housing (rent or mortgage)
- Utilities (water, heating/cooling, electricity, phone, etc.)
- Food
- Health care
- Transportation
- Insurance
- Child care
- Clothing
Some of these examples may look different for different people. For example, for some people, adequate transportation requires having a vehicle to commute to work. For others, adequate transportation could mean the money they spend on public transportation or an alternative means of getting around.
Examples of Wants
As we’ve mentioned, wants are those items that improve your quality of life but aren’t entirely necessary to have in your budget. Some examples of wants that many people may have in their budgets include:
- Dining out
- Entertainment
- Streaming services and subscriptions
- Travel
- Gym memberships
- Electronics (above and beyond what’s needed for work and basic communication)
- Home decor
- Clothing (above and beyond the absolute necessities)
As you can see, some items on the wants list can be repeated on the needs list. Yes, clothing is a necessary purchase. However, most of us could get away with a relatively small wardrobe as long as it’s weather-appropriate and meets the requirements of our workplace dress code.
However, many of us also spend far more on clothing than the bare minimum we actually need. Having a large wardrobe or purchasing expensive designer pieces would be considered a want rather than a need—unless you work in the fashion industry, for example.
Budgeting for Needs and Wants
There’s a good chance you’ve read budgeting advice that recommends cutting anything unnecessary from your budget. We aren’t suggesting that at all—in fact, we think you should embrace having wants in your budget.
Once you’re comfortable differentiating between wants and needs, you can prioritize the wants in your budget. There’s not necessarily a right or wrong way to do this as long as you have adequate money left to spend on all of your needs. But one popular method is the 50/30/20 budget rule.
The 50/30/20 budget rule states that you should use the following percentages of your income to allocate your spending:
- 50% on needs
- 30% on wants
- 20% on savings and debt
Tip
You’ll notice that savings is a separate category, but it could also be considered either a need or a want. For example, you might consider the savings you send to your retirement account to be a need. Meanwhile, the money you save for a vacation might be a part of the 30% of your income you spend on wants.
Having this general rule of thumb can be helpful if you aren’t sure how much you should be spending in each category. It can also be useful in helping you identify areas where you may be overspending.
That being said, you should take these percentages with a grain of salt, as they won’t apply to everyone equally.
First, people with relatively low incomes or who live in high-cost-of-living areas may find they must spend more than 50% of their income on needs. For example, residents of some of the country’s most expensive cities may spend nearly 50% of their income on rent alone (and in New York City, rent takes up nearly 70% of many people’s income).
On the other hand, someone with an exceptionally high income or living in a low-cost-of-living area may find they can get by spending far less than 50% of their income on needs. As a result, they may have more money left over for wants, savings, and debt.
Another factor you’ll have to consider is whether 20% of your income is enough to spend on savings and debt. If you have a large amount of debt, you may want—or need—to allocate more than 20% to be able to meet your debt payments while also putting money into savings.
An Alternative Budgeting Method
Another way to determine how much you can afford to spend on wants is this:
- Calculate the total monthly cost of your needs. Include your set monthly payments, as well as your average spending for variable categories like food.
- Decide how much you want to allocate toward savings each month, as well as whether you want to put any additional funds above your minimum payments toward debt.
- Once you’ve calculated your needs, savings, and debt amounts, you’ll know how much is left in your monthly budget to allocate toward your wants. Because you’ve met your other obligations first, you can spend guilt-free on this remaining category.
Note
The strategy described above is often referred to as reverse budgeting or the pay-yourself-first method, where you save money first and spend what’s left over after that rather than saving what’s left after spending.
What Is the Difference Between a Need and a Want?
A need is anything that you require to maintain your physical, emotional, and financial health, while a want is anything extra. To a certain extent, needs and wants are subjective. Different people have different priorities. Regardless of your situation, identifying needs versus wants is essential to a useful budget. Understanding what’s necessary and what’s nice to have can help you decide which items to cut from your budget when required.
How Do You Determine Needs vs. Wants?
Needs include food, housing, health care, 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 versus a need.
How Do You Budget Financially?
Many financial experts recommend the 50/30/20 rule, which allocates 50% of your after-tax income to needs, 30% to wants, and 20% to debt payments beyond the minimum and savings. Other experts advocate paying for necessities first, then savings, then extras. However, the best budget is one you can stick to over the long term.
The Bottom Line
When you are creating a budget it’s important to differentiate between the things you need and the items you want. Knowing what your needs are versus your wants takes some thought, and the resulting lists will be different from person to person. With these lists in hand, you’ll be ready to set your budget.
One popular allocation method to follow is the 50/30/20 budgeting rule, which suggests that 50% of your income should go to needs, 30% to wants, and 20% to savings and debt. Alternatively, you could “pay yourself first” and set aside money first for needs, then for savings and debt payments, and use what’s left over for wants. In the end, what’s key is to establish a budget. That’s how you’ll stay on track financially and meet your goals.