Defining the difference between needs vs. wants is an essential step when you are building a budget. And while this is usually a straightforward determination, there can be nuance between the two depending on your situation.
On top of that, wants and needs together make up the total costs within your budget, and are where you need to focus if you are looking to save more money.
Below we’ll dive into the difference between needs and wants, how they fit into your budget, and how to save money in both areas.
The Difference Between Needs vs. Wants
Needs Definition: Needs include any costs that are necessary to stay alive and perform essential tasks.
Needs are your essentials.
They are areas within your budget that you can cut back on, but you cannot completely cut these expenses of your budget. For example, you likely need a place to live, and while you could find a cheaper place to live to save money, you cannot completely cut your rent or mortgage payment from your budget (unless you move in with your parents or a friend).
Examples of Needs:
- Rent or mortgage
- Transportation (and related costs, like car insurance)
- Health insurance, healthcare, and medicine
- A basic phone plan
- Basic clothing
Wants Definition: Wants include any costs that are not absolutely necessary to stay alive and perform essential tasks.
Wants are things you spend money on to make your life easier or bring you joy, but they are not 100% necessary.
While you can cut some wants completely out of your budget, I don’t think you can cut all wants out of your budget. For example, if you determine that buying new clothes every month doesn’t really bring you lasting joy or happiness, then cutting that spending out of your budget would be a smart move. However, cutting every fun expense out of your budget (cable, eating out, fun clothes, etc.) is not advised!
Examples of Wants:
- Eating out
- Games, movies, and a cable package
- Most new clothing or designer clothing
- Expensive gym memberships
- Sporting equipment
Where There is Overlap Between Needs and Wants
Generally speaking, it is easy to differentiate financial needs from wants. However, the line between wants vs. needs can sometimes get blurry.
Needs That Are Actually Wants
For example, let’s look at a need that is actually a want.
Transportation is a spending category that is often deemed as a need. After all, you need to be able to travel to work, get groceries, and so on.
However, how you travel around is where things get nuanced. Let’s say you live in the city and bought a brand new car for $15,000 and justified it as a need because it is “transportation.” Is that the right way to look at this expense?
Technically, yes, but you also have to consider the alternatives within the transportation category. Could you have bought a used car for $5,000? Or used public transportation for $1,000 per year? Or bought an old bike for $300?
There are levels of spending within different categories of needs, and the more you spend on a need, the more likely it is to be a want in disguise.
These levels of spending exist in many other categories and are important to be mindful of when going through your budget.
Wants That Are Actually Needs
On the flip side, you can also have wants that are actually needs.
This scenario is rarer, but still exists. As one example, take someone who loves to read. Technically, spending on books would be considered entertainment and classified as a want.
And this classification is mostly true – you don’t need to spend money on books to continue to live and perform your essential duties. But if not reading would severely impact your happiness, I could see the case for moving books into your needs category.
Potentially, you could get away with not spending money here for a few months or even years, but they are necessary for your happiness over the long run.
And of course, if you have a good library nearby, you could consider your levels of spending within this category and read for free!
How to Budget for Needs and Wants
One popular way to create a budget for needs and wants is to use the 50/30/20 Budget, first recommended by Elizabeth Warren and Amelia Warren Tyagi. This budget consists of using 50% of your after-tax income (paycheck) for needs, 30% for wants, and 20% for saving.
It’s simple and effective, but in my opinion, a little too rigid.
I prefer budgeting in a different way that involves three steps.
1. Start with Needs
First, you need to budget for your needs.
These are the expenses you cannot live without, and therefore get prioritized in your budget.
How to Save on Needs: Remember, while needs cannot be completely eliminated from your budget, they can be reduced in cost. Therefore, you need to be mindful of levels of spending and reduce the cost of your needs where it makes sense.
2. Prioritize Saving and Investing
This would include things like building up your emergency fund, saving for retirement, and even storing money in a health savings account (HSA) and paying for life insurance.
While how much you set aside will depend on your retirement goals, monthly income, and monthly expenses, anywhere between 10-20% is a good starting point. Some people will even save 50% or more depending on their long term goals (i.e. to reach financial freedom or financial independence).
3. Save Room for Wants
Last, but not least, it’s essential to save some room in your budget for fun spending.
While this is the third priority behind meeting your basic needs and setting aside some savings, it should still be a priority.
How to Save on Wants: The key to saving money on wants is to ensure you are spending on the wants that bring you the most joy and value. It helps to examine your spending once in a while to look back at where your money is going and analyze if what you spent your hard-earned cash on was worth it. This analysis can help you prioritize where to spend going forward.
Summary: Needs vs. Wants
Understanding how needs and wants fit into your monthly budget and how you can save on these two different types of expenses is vital if you want to succeed financially.
In order to save money:
- With needs, it’s all about reducing these costs and your level of spending within them.
- With wants, it’s about prioritizing your spending on the ones that bring you the most value.
And if you’re lucky enough where you are looking to increase your spending because you are hitting all of your personal finance goals, you can apply these principles in reverse to ensure you are getting the most value out of the money you spend!