If you take a look at a random budget guide, there’s a chance the guide will discuss spending in terms of needs vs wants. At the outset, separating these two might be a simple task. But it isn’t always easy distinguishing one from the other. It doesn’t matter if you’re just starting to budget or you’re a savvy pro. There comes a point when you may wonder how your spending fits into one of these categories.
Do you really need car insurance? Or what about a new car to get to work? How about that fruit smoothie that promises to improve your gut health?
If you aren’t sure where to draw the line, keep scrolling. Here’s a simple yet thorough guide to help you understand your financial needs.
What Are Needs vs Wants?
At its most basic level, every budget is composed of two types of expenses:
- Financial Needs
- Financial Wants
Sometimes, your needs and wants will overlap. But usually, they represent two distinct pillars of your spending.
What Are Financial Needs?
If you were to strip your budget down to its bare essentials, what would you have? Rent? Food and water? Heat and electricity?
When it’s all said and done, the foundation of your budget is made up of items and services that have a direct impact on your health and safety.
By no coincidence, these also make up your financial needs. At the core of every budget are the basic things you need to survive.
Some expenses that likely fall under your financial needs include:
- Shelter
- Food
- Water
- Clothing
- Utilities
- Transportation
Your Needs May Be Different
Generally, everyone needs a place to live, food to eat, and clothes to wear. But some needs are unique.
Let’s look at transportation as an example.
If you live in a part of the country that doesn’t have reliable public transportation, and you work in the next county over, a vehicle is probably one of your financial necessities.
All the expenses involved in its upkeep — like gas, maintenance, and insurance — would join your list of financial needs as a result.
But let’s say you live and work in New York City. Then things might be different.
You may not need a car to get around the Big Apple, as it boasts one of the best public transportation system in the country. In fact, it might be better that you don’t have one, considering how much it would cost to maintain.
What Are Financial Wants?
Once you have a foundation of your financial needs fulfilled, you might be ready to start building up your budget with wants.
Your financial wants are like the inverse of your financial needs. Whereas needs are items and services you can’t live without, wants are things you can eliminate from your budget without threatening your health or safety. They’re expenses that enrich your life by making it more pleasurable.
Some examples of expenses that may fall under your financial wants include:
- Travel
- Designer clothes
- Concert, theatre, and movie tickets
- Hobbies
- Gym membership
- Gardening and home decorations
What Are Discretionary Expenses?
Discretionary expenses are wants — it’s just that simple. Discretionary expenses and wants are interchangeable terms in the financial world.
What Are Non-Discretionary Expenses?
Non-discretionary expenses are just the opposite of discretionary expenses. It’s another word for your financial necessities or financial needs.
Some financial advisors will mention non-discretionary expenses when talking about budgets, so it’s a good term to know just in case.
How Do You Draw the Line Between Needs vs Wants?
Some things are easy to categorize, but not every item in your budget will slot neatly into place. There may be some expenses that straddle the line between needs and wants.
For example, shelter is a need. But a penthouse apartment and a summer home are wants.
Food is a necessity, but takeout sushi and ice cream are wants.
A vehicle may be one of your needs, but a luxury car is a want.
A basic cell phone may be a financial need, but the upcoming iPhone and an unlimited data plan is a want.
How to Spot the Differences Between Needs and Wants
Untangling your needs from your wants may be a challenge, but it’s possible. Go through your list of expenses and think about how they fit into your life.
Think carefully about the particular brands and tiers of services you choose — not just the purchases themselves. Remember, a need vs want may come down to something as specific as the model of car you buy.
If you can function and keep up with your bills without an item or service, it’s probably a want.
However, if you would struggle to live in a healthy manner if you removed a particular thing from your life, it’s likely a need.
Where Do Your Savings Fit In?
Many people may tell you that your savings are one of your financial necessities. Savings are considered essential because they help plan for major life changes, like a raising a child or buying a home.
They’re also a safety net to catch you in case of an emergency. Although an online cash advance may be a practical stopgap during a tight month, there’s no better way to cover unexpected emergency expenses or repairs than with savings.
If you haven’t included savings in your list of needs, add them now. In most cases, you’ll likely want to set aside 20 percent of your income for savings.
What About Your Online Loan?
If you have outstanding online loans, paying it back is a need. You have a responsibility to repay what you owe by its due date. Missing a due date may come with consequences for your credit, as well as additional fees and interest.
If you’re deciding between a bank and another lender, make sure you get more info on how a lender like MoneyKey operates compared to traditional lenders. This may help you choose the option that’s right for your situation.
How to Build a Budget Around Wants vs Needs
When you’re ready to create a budget, start tracking your expenses. You can do this by hand or by using an app. There are budgeting tools that don't cost you anything to use, and they simplify this process.
Once you have a list of your expenses, go line by line to see if an item is something you can live without. By the end of it all, you’ll have split your budget into wants vs needs.
Then look to how much you’re spending in each category. Generally, you’ll want to cover everything in your needs pile with enough leftover to cover some or all of your wants.
If you don’t have enough cash to strike this balance, something needs to change.
Start by cutting out wants
It may be hard to give up Friday night takeout or weekly online shopping trips. But this kind of spending can be a prime source for savings if you cut down on these expenses and shift the money towards your savings.
You may be able to cut them out and still manage well enough, even if their absence makes life a little less fun since they most likely aren’t vital to your survival, like many of your other wants.
Some common discretionary expenses you may be able to slash include:
- Takeout and snacks: Do you have a habit of leaving the office at lunch to buy fast food? Swap out costly pre-made foods of convenience by bringing meals from home, making sure to have nutritious and cheap snacks like apples or bananas with you to save you from hunger pains.
- Alcohol: Between wine with dinner at home, Friday night drinks with colleagues, and cocktails with friends over the weekend, the cost of alcohol adds up. Water, by comparison, is free. You may also try pop or carbonated water to lower how much you spend on beverages.
- Gym memberships: Costly gym memberships may add as much as $696, or more per year to your expenses. You can save all of that by switching to a free at-home workout routine.
Finding the right substitute to gyms, drinks, and snacks will make it easier to go without these things. But if you’re still struggling to avoid making these purchases, check out these tips for improving your spending habits. They’ll help you set appropriate spending goals, so may be more likely to succeed.
What if You Already Follow a Strict Budget?
The above advice may be helpful when you have a habit of overindulging in wants, but it may not be useful to someone who’s following an exceptionally tight budget.
If you only ever get takeout once or twice a year, eliminating this splurge won’t free up a lot of cash. If you have few discretionary expenses in your budget, you need to find another source for your savings. Try looking at your financial necessities to see if you can make any positive changes that free up more cash.
Reduce what you spend on needs
Reducing what you spend on the financial necessities will take more effort, but it’s still possible.
Go through your needs and consider what you’re willing and able to adjust to decrease your expenses.
Some non-discretionary expenses that you might be able to reduce include:
- Housing: Moving is a big decision, but it might be the right decision if you’re spending too much of your income on rent. Look around to see if you can find a good option for less money, possibly in a different neighborhood. The cost and effort of moving may be worth it if you find significant savings.
- Utilities: Do you keep your AC blasting when you aren’t home? Do you have extra-long, extra-hot showers? Cutting back on these small habits may have an impact on your utility bills. You may want to check out this post to find out how you may be able to slash what you pay for utilities.
- Food: Groceries can rival the cost of takeout if you consistently choose gourmet ingredients, imported foods, and other specialty items. Pare your purchases down to the basics and focus on store-brand items and in-season produce to help you possibly find some financial relief.
This isn’t the first time we’ve mentioned eliminating unnecessary spending from your budget on our blog, and it won’t be the last. It’s a great way of taking control of your finances.
By trimming the fat from other areas of your budget, you may be able to cover your financial necessities and move more money into savings.
This might put you in a better position should a costly expense rear its head unexpectedly. However, if you find yourself short even after tapping into your savings, a personal line of credit may be able to act as a safety net.
A line of credit works more like a credit card than an installment loan. But bear in mind personal lines of credit and credit cards aren’t identical. You should learn more about these differences before you apply for either one.
Bottom Line
It may take a lot of time and effort to go through your expenses and commit to spending less. But your hard work should pay off. It may help you free up more cash, so you’re in a better position to pay bills and save money every month.
And let’s be honest — savings are an amazing thing to have. Not only can they help cover an emergency bill, but they may also possibly give you the freedom to indulge in some of your wants.
Most people can’t afford everything they want all at once. But with time, a budget, and more savings, you may be able to go through your list and splurge occasionally in a responsible way. And you may even appreciate these splurges more when you do.
