A proper budget makes room for needs and wants. Sometimes, though, it’s hard to differentiate between the two. It can be subjective, but certain things are clear-cut and easy to determine.
So how do you tell? Let’s look at the basic definition of each.
What are Needs?
Needs are items you must have to survive. Clothes, food, proper healthcare, and transportation – those are needs. You can’t live without them, and these apply to everyone.
Other needs may be more individualized. For example, one person may NEED dental insurance because they have extensive dental issues, while another person may only go to the dentist for routine cleanings twice a year and may not consider dental insurance a need.
Write down the things you NEED in your life. If you didn’t have one, it would make it hard to survive or cause financial destruction.
What are Wants?
Another word for wants is luxury. Things you may want but could live without are wants. This is where you may split hairs a little bit when looking at needs vs. wants.
For example, you need shoes. But do you need the latest pair of Air Jordans or a pair of Coach shoes? No. Instead, a need would be essential shoes that support your feet and protect you from the elements. If you want to splurge on name-brand items, that’s fine, but they should fall into your ‘wants’ budget.
Budgeting for Needs and Wants
Now the bigger question is, how do you budget for needs and wants? Needs are non-negotiable. Fit them into your budget as there’s no room for negotiation on them.
On the other hand, wants are something you can put off or save for to not blow your budget.
Certain budgets, like the 50/30/20 budget, allows 50 percent of your income for needs, 30 percent for wants, and 20 percent for savings and debt payoff. This is a great way to make sure you have room for the ‘luxuries’ while ensuring you meet your needs and save or pay off your debt.
Be Honest With Yourself about your Needs and Wants
It’s easy to consider everything as a need but don’t. You aren’t doing yourself any favors. If you overspend, you won’t have money for an emergency fund, meet your financial goals, or save for retirement.
Look through your bank statements carefully. Do you notice areas you overspend? It’s time to rethink those expenses and figure out a way to fit them in, so you don’t feel like you have to sacrifice and overlook your wants. Sacrificing too much leads to feeling restricted, which leads to overspending.
Avoid this by budgeting accordingly, making room for both your needs and wants.