Making the distinction between wants vs needs isn’t always easy, but it is necessary to manage your finances. Do you know how to tell the difference between a want and a need? Getting a handle on your spending will help you live within your means. And if your’re very ambitious, you may get to where you’re living below your means.
I can help you identify necessary expenses from nonessential costs to help you make the most of your money and live comfortably on your budget. Learning how to tell the difference between wants and needs and understanding how to budget for both types of expenses can help you build your wealth and live your best life.
Definition of Needs and Wants
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Needs and wants mean very different things, although sometimes these words are used interchangeably. Needs are essential expenses that are necessary for you to live and work. Housing, food, clothing, transportation and insurance are all examples of needs.
Wants are non-essential expenses that are nice to have. Vacations, entertainment, eating out and luxury items are examples of wants. These are all items that make your life more fun and enjoyable but are not mandatory in order to survive.
Telling the Difference Between Wants Vs Needs
Sometimes the line between wants and needs can be hard to define. Clothing is a need and you definitely must have clothing to protect yourself from the elements and be a productive member of society. While clothing, in general, is a need, expensive designer clothing is not mandatory and falls under the distinction of want instead of need.
To further complicate matters, in some instances expensive, designer clothing may be considered a need. In certain professions it may be expected and even required for individuals to be well dressed. In this instance, expensive clothing for work and related functions is in fact a need, but this is a rare exception.
Appreciate What You Have
Realizing your Netflix subscription or afternoon latte are wants and not truly needs can be eye-opening. Looking at all of the things you want that you cannot afford can be depressing and cause you to question if it’s really worth sticking to your budget. The short answer is yes.
Learning to appreciate what you have can help you gain perspective. You may want nicer things, but there are plenty of people who would love to have the things you can afford. It is important to understand that keeping to your budget now will enable you to maintain and grow your wealth in the future.
Don’t Let Your Want Turn Into Need
It is far to easy for most people to talk themselves into thinking a want is really a need. You may think TV is necessary and completely a need, whether you use cable, satellite or another type of service. This is not the case, and TV is a want.
Failing to properly identify wants can end up being a costly mistake. That’s not to say you should go without TV, but you can find alternate ways to keep this want within your budget. You can downgrade your service package or cut other expenses that are not as important to you, in order to finance your TV service.
Think Before You Buy
Before making a purchase ask yourself if the item is something you need or something you want. Even if the answer is obvious, just asking the question will make you think about how the purchase will impact your budget. Getting into this habit ensures you are always aware of how you are spending your money.
Evaluate What Your Current Spending Habits
Look at your current spending to figure out how you are using your money. A good guide for establishing a budget is using the 50/30/20 rule. This means 50 percent of your monthly income is spent on needs, like housing, groceries and so forth, 30 percent is spent on wants, like going out and the remaining 20 percent goes into savings or paying off debt.
These percentages can be fine-tuned to best fit your specific circumstances, but this is a good starting point for addressing wants vs needs in your budget. Tracking your expenses helps you understand how you are spending your money and enables you to look for ways to be savvier in your choices.
Everything in Moderation
There is a place in your budget for items and services that fall squarely in the want category. Dedicating a portion of your budget to your wants enables you to enjoy things you like while still building your wealth. Allowing vacations, expensive clothing, eating out and other non-essential expenses to overwhelm your budget can impact your long-term financial health.
Prioritization System of Your Needs and Wants
Looking at things solely in terms of wants vs needs can help you make some purchasing decisions, but things are not always that easy to define. Try to assign both a want and need value to purchases to help you gain a better understanding of the actual value of the product or service. Looking at your purchases in terms of high or low want and high or low need can help you better understand how to incorporate items into your budget.
Low Want and Low Need
Items that you do not want and do not need are easy to pass up. These are products and services that just do not appeal to you in any way and would end up being a complete waste of money.
Low Want and High Need
It can be incredibly tempting to pass on low want and high need expenses, but this decision can be a mistake. A great example would be insurance. You probably don’t want to read the paperwork and figure out the right coverage, but failure to do so could end up in costly bills.
High Want and Low Need
The opposite end of the spectrum, which is equally challenging, is high want and low need. This is where it can be easy to lose sight of your spending and purchase things you certainly do not need. You can purchase items you want but do not need, but this is where it is important to stick to your budget.
High Want and High Need
Anything that earns the high want and high need distinction is a good investment. These are items you need to order to live and work, but also things you want to have in your life. High want and high need is the ideal circumstances in terms of making purchasing decisions.
Understanding how the things you want and the things you need impact your budget can help you make better decisions about your personal wealth and impact your overall happiness. Before making a purchase consider these questions:
- Do I want this item?
- Do I need this item?
- How does this item fit into my budget?
Do you have questions about how to tell the difference between wants vs needs? Reach out in the comments and I’ll get back to you!