Sometimes, It's Hard to Tell the Difference
One of the most important parts of setting up a monthly budget is separating needs vs. wants. Before assigning dollar amounts to categories, it’s important to know which parts of your monthly expenses are needs, and which items are great to have, but aren't a necessity, or your wants. Many people find determining wants vs. needs challenging. Some even give up on budgeting when they face this step.
Great news. It doesn’t have to be this way! Below, we’ve outlined how to determine your wants and needs, as well as how to separate the two on a monthly budget.
Defining Your Needs vs. Wants
Needs are things that a person must have to live and function.
Wants are things that can help improve the quality of a person's life.
The basic human needs include food, clothing, shelter and medical care. Wants include everything else. However, you’ll find when creating a budget, these terms are more fluid than they appear to be. While working through your lists, you may find that some items can fit into both categories, making the process confusing.
A good trick for dividing wants from needs is to let some time pass before fulfilling your desire for the item, either theoretically practically. The desire to obtain a need only grows stronger as time passes, while the desire to fulfill a want will weaken with passing time.
Listing Your Needs vs. Wants
Now that we’ve defined the categories, you can begin listing your own needs and wants.
Start with needs, including the basics, like food, rent or mortgage. Make sure to consider other fixed expenditures necessary for you to live and function. That may include transportation costs, health insurance coverage, and clothing or tools you need for work.
Needs will vary from one person to another, and even for one person at different stages of life. For example, a family with two working parents, living in a community with no public transportation may require two vehicles. Where as a family living in a city with several transportation systems may list a second car as a want. A four-bedroom home may be a need for a young family with several young children, but turn into a want when their kids become adults.
If you get stuck on an item and don’t know where to place it, hold it up to the following questions:
- Do I really need this item to live and function?
- Is it possible to fill this need in a less expensive way?
- How would my life be different if this item were not a part of it?
When you’ve completed your list of needs, you can list all remaining expenses in your category of wants.
Reviewing and Tweaking Your lists
After completing this exercise, review your list of needs to see if anything can be removed. Will you still need these items a few years from now, or even a few months from now? Can any of your needs be swapped for a cheaper option? For example, you may need clothing, but do you need eight pairs of designer jeans?
Do the same for your list of wants. Any of them only there because of pressure to keep up with others or look good? Which of your wants were more important to you in the past than they are today? Are any just status symbols? Pare down your list until you’re only left with the wants that truly add value to your life.
Now that you can tell the difference between needs vs. wants, creating a monthly budget is simple!
- Assign dollar amounts to your fixed and non-fixed needs.
- Set aside money for savings and to pay down debts.
- Use the rest to pay for your wants.
Is Building Your Savings a Need or a Want?
According to an article from thebalance.com, it may feel like putting money aside for savings or paying extra on debts should be classified as wants, because there are no instant relief or gratification gained form doing so. A person may feel like they can survive the month more comfortably if they don't put away money for retirement or build an emergency fund.
Saving for the future and getting out of current and past debts are also considered needs by many, as they are investments in a person's long-term financial well-being. It makes no difference if you save $10 a month or $10,000, planning for your long-term well-being should be seen as a necessary expense.
Harvester Financial members have many savings options available to them. To learn more, please visit: https://www.harvesterfcu.org/savings/.
You’ll likely also have an easier time keeping your impulse buys under control. Before purchasing an item, ask yourself if it’s a need or a want. If the item is a want, consider its importance and other wants you’ve recently bought before going ahead with the purchase.
Separating needs vs. wants can be one of the most challenging parts of creating a monthly budget. Follow the steps outlined above to learn how to make the distinction between these two spending categories with ease!