Defining the distinction between necessities and wants is an important step in budgeting. While this is typically a simple determination, there might be subtle differences between the two depending on your circumstances.
Furthermore, wants and necessities combined account for the overall cost within your budget and should be prioritized if you want to save more money.
Below, we’ll discuss the distinction between necessities and desires, how they fit into your budget, and how to save money in both categories.
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The Difference Between Needs and Wants
Needs Definition: Needs include all expenses required to stay alive and conduct important jobs.
Needs are fundamental.
They are parts of your budget that you can reduce, but you cannot eliminate them entirely. For example, you’ll almost certainly need a place to live, and while you may locate a cheaper place to live to save money, you won’t be able to eliminate your rent or mortgage payment entirely from your budget.
Examples of needs:
Rent or mortgage?
Transportation (and associated fees, such as auto insurance)
Food
Health insurance, healthcare, and medications
A basic telephone plan
Basic clothes.
Defining Wants
Wants Definition: Wants comprise any expenses that are not strictly required to keep alive and conduct important jobs.
Wants are items that you purchase to make your life simpler or more enjoyable, but they are not strictly required.
While you may eliminate certain wants from your budget, I do not believe you can eliminate all wants. For example, if you find that buying new clothes every month does not provide you long-term satisfaction or contentment, eliminating that expense from your budget would be a wise decision. However, eliminating all enjoyable expenses from your budget (cable, dining out, fun clothing, etc.) is not recommended!
Examples of Wants:
Entertainment options include dining out, games, movies, and cable packages.
Vacation
Most new or designer apparel.
Expensive gym subscriptions.
Decorations
Sporting Equipment
Where there is overlap between needs and wants.
In general, financial necessities and wants are easily distinguishable. However, the distinction between desires and necessities can occasionally become hazy.
Needs Are Actually Wants
For example, consider a necessity that is truly a wish.
Transportation is an expenditure area that is frequently perceived as a necessity. After all, you must be able to commute to work, buy groceries, and so on.
However, how you get about is where things become complex. Let’s imagine you reside in the city and paid $15,000 for a brand new automobile, justifying it as a need because it is “transportation.” Is it the proper way to look at this expense?
Technically, yes, but you must also examine the alternatives in the transportation area. Could you have purchased a used vehicle for $5,000? Or utilized public transit for $1,000 a year? Or did you buy an old bike for $300?
There are many levels of expenditure within each category of need, and the more you spend on a need, the more likely it is to be a want disguised as a need.
These amounts of spending exist in a variety of different categories and should be considered while reviewing your budget.
Wants That Are Actually Needs.
On the other hand, you may desire items that are truly necessary.
This is an unusual case, yet it still exists. As an example, consider someone who enjoys reading. Purchasing books would be deemed entertainment and categorized as a wish.
And this classification is generally correct–you do not need to spend money on books to live and execute your basic functions. However, if not reading would have a significant influence on your happiness, I might see a case for include books in your requirements list.
You may avoid spending money here for a few months or even years, but it is vital for your long-term satisfaction.
Of course, if you have a decent library nearby, you may limit your expenditures in this category and read for free!
How to Budget for Needs and Wants?
The 50/30/20 Budget, initially proposed by Elizabeth Warren and Amelia Warren Tyagi, is a common method for creating a needs-and-wants budget. This budget allocates 50% of your after-tax income (paycheck) to necessities, 30% to desires, and 20% to savings.
It’s straightforward and functional, however I think it’s a touch too stiff.
I favor an alternative budgeting method that consists of three parts.
1. Begin with Needs.
First, make a budget for your necessities.
These are the costs you can’t live without, therefore they are prioritized in your budget.
How to Save on Needs: Remember that, while needs cannot be totally removed from your budget, they may be decreased. As a result, you must be cautious of your spending habits and cut back on unnecessary expenses.
2. Prioritize saving and investing.
Before spending any more money than you need, you should set aside some for savings and investing.
This might include things like setting up an emergency fund, saving for retirement, and even putting money in a health savings account (HSA) and purchasing life insurance.
Pro Tip: Keep your savings and emergency funds in a high-yield savings account, such as CIT Bank.
While the amount you set up will be determined by your retirement objectives, monthly income, and monthly expenses, anything from 10% to 20% is a decent starting point. Some people will even save 50% or more, depending on their long-term goals (e.g., financial freedom or independence).
3. Make Room for Wants.
Last but not least, make sure you have some money set up for recreational activities.
While this is the third priority after fulfilling your fundamental necessities and saving some money, it should still be a priority.
How to Save on desires: The secret to saving money on desires is to focus your spending on the things that offer you the greatest joy and value. It’s a good idea to review your expenditures every now and then to see where your money is going and whether what you’re spending it on was worthwhile. This study might help you prioritize your future spending.
In Conclusion
Understanding how requirements and desires fit into your monthly budget, as well as how to save on these two categories of spending, is critical for financial success.
How to save money:
With necessities, it’s all about lowering these expenses and your degree of spending within them.
When it comes to wants, it’s important to prioritize your spending on the items that provide the greatest value.
And if you are fortunate enough to be able to raise your spending because you have met all of your personal financial objectives, you can utilize these concepts in reverse to guarantee you are receiving the best value for your money!
