Knowing the difference between wants vs. needs is an important part of financial planning. Keep reading for some tips on classifying your expenses correctly and budgeting effectively between these two buckets.
Wants vs. needs: The basics
Simply put, wants are items and experiences you don’t need for survival. Clear-cut examples of wants include:
- luxury vehicles
- new clothes (assuming there’s nothing wrong with your old clothes)
- recreational activities (i.e. golf)
Conversely, needs are items and experiences you must have to survive. Clear-cut examples of purchases that fall into this category include:
- transportation to and from work
Of course, there’s plenty of gray area between these categories as well.
For example, transportation to and from work is essential. However, if public transit would suffice and be cheaper yet you decide to purchase a vehicle for comfort, I’d argue your car is not a need.
Similarly, food is essential. But if you decide to dine out rather than cook a cheaper meal at home, that purchase arguably goes beyond fulfilling a need.
To provide yet another example, shelter is also essential. You don’t need a luxury apartment within walking distance of your favorite bars, though. A cheaper place would provide shelter just fine.
Since I’m on a roll with these examples, let me throw another one at you. In the modern world, computers are arguably essential. In some industries, you simply wouldn’t be able to work without one. For most people, though, a $500 Dell would get the job done. As much as I love Apple, a $2,000 MacBook would land firmly in want territory.
Questions to ask when determining whether something is a want vs. need
Answering the following questions before any purchase should help you get a clearer picture of which bucket it falls into.
1. Does this fulfill (or help me fulfill) a basic human need?
The list of basic human needs isn’t very long:
Any purchase that doesn’t fulfill (or help you fulfill – i.e. a vehicle that helps you get to and from work) at least one of these basic needs is clearly a want.
2. Why am I compelled to purchase this?
With most wants, the honest answer to this question will be something along the lines of, “because it would make me happy.” With any need, on the other hand, the answer will be something along the lines of, “because I (or people I provide for) wouldn’t survive without it.”
Of course, arriving at an honest answer to this question may take effort the first few times you conduct this exercise. With some wants, it’s very easy to make excuses and convince yourself you actually need them (i.e. telling yourself, “transportation is essential, so I clearly need this BMW”).
Remember, though – being honest with yourself and acknowledging something is a want doesn’t mean you can’t buy it.
3. What are the likely consequences of not buying this?
If you go long enough without food or shelter, you’ll end up with serious health problems. If you go long enough without making car payments, you’ll lose your vehicle and potentially your livelihood if driving is essential for that. These are very clear reasons to place those expenses firmly in the need category.
Conversely, the consequences of not purchasing any want are much less dire. Forgoing a vacation to Mexico may leave you unhappy but you won’t starve or be living on the street as a result. The same goes for buying new clothes or upgrading a vehicle that operates just fine.
4. If this fulfills a need, is there a cheaper alternative?
Here’s another great question to ask when distinguishing between wants vs. needs. This question is particularly helpful since you can use it to determine whether you truly need something or are using a legitimate need as an excuse to purchase a want.
Transportation is a classic example. There’s no denying you need some means of getting to and from work. That doesn’t justify buying an Audi, though. In fact, it may not justify buying a car at all if you could use public transit at a fraction of the cost. Your primary purpose for purchasing a vehicle in this scenario would be to fulfill a want (i.e. comfort or convenience). The fact it also fulfills a need is secondary.
5. If this fulfills a need, do I already have something capable of doing the same thing?
When distinguishing between wants vs. needs, it helps to consider whether you already own anything capable of fulfilling the intended purpose.
Clothes are a classic example of this. You need clothes. But if you already have a full wardrobe at home, any new items you purchase are likely better described as wants than needs.
Tips for budgeting between wants and needs
The questions in the previous section should help you categorize expenses properly. Next, let’s talk about how you can incorporate these categorizations into your budget.
Choose an appropriate income split between wants and needs
Conventional personal finance wisdom advocates splitting your income like such:
- Needs: 50%
- Wants: 30%
- Saving: 20%
I’d argue you need to think a little deeper, though. Take your financial situation and goals into account. If you plan on retiring early, for example, you might want to reduce the percentage of your income that goes towards needs and wants while increasing your savings rate. Conversely, if you’ve already retired after decades of managing your money wisely, you might be able to justify spending more on wants.
Keeping track of how your income is split between wants and needs is much easier when you’re financially organized. Check out this article I wrote on that topic for some tips on tracking your expenses.
It’s worth noting that you may even want to split individual expenses into wants vs. needs. Let’s take transportation as an example.
The cheapest possible means of transportation to and from work should go in the need category. Only amounts in excess of that should go in the want bucket.
So if public transportation would cost you $200 monthly but you purchase a vehicle at a cost of $500 monthly to fulfill the same need, only $300 of that cost should go in the want bucket. The other $200 should stay in the need category since you would’ve spent it on transportation anyway.
Be honest about how much you’ll spend on wants
It’s very easy to say you’ll spend less on wants. Actually doing it is a different story.
In the long run, though, you should strive to keep yourself honest. Saying you’ll only spend 10% of your income on wants will set you up for discouragement if you end up spending much more. You’ll also have false financial expectations and likely end up with less money in savings than expected after compensating for having spent more on wants than initially planned.
Categorize expenses more honestly to account for wants vs. needs as well
As I’ve pointed out a few times in this article, many expenses fall into a grey area between wants and needs. Take this into account when setting up your budget categories.
Dining out, for example, should arguably be classified as entertainment (alongside Netflix, alcohol, etc) as opposed to food (which should be reserved solely for bare essentials such as groceries). The same goes for luxury vehicles, which should arguably be classified as recreational rather than purely transportation.
Get even more granular with your categorizations if needed
Categorizing expenses as either needs or wants may not be granular enough. Prateek Vasisht writing on Medium proposes going one step further and placing each expense in one of the following categories:
- high-priority needs
- high-priority wants
- low-priority needs
- low-priority wants
For example, food would be a high-priority need. Shelter may be a low-priority need from a budgeting perspective depending on your lifestyle (i.e. if you live with your parents or spend most of your time on the road for work).
If you’re a foodie, meanwhile, luxury dinners out might rank as a high-priority want. Conversely, if you don’t care much for fancy vehicles, a car might be a low-priority want.
Categorizing your needs and wants this way should help you decide where to spend your money for maximum life satisfaction.
Wants vs. needs: Conclusion
I hope this article has helped you understand the difference between wants vs. needs and how you can budget for both effectively. Click here to read more of my articles on the topic of spending money wisely.