Financial needs versus wants: How to tell them apart and why its important
Key takeaways
- It’s important to differentiate between needs and wants when assessing monthly expenditures.
- The 50/30/20 rule is a helpful way to allocate income: 50 percent for needs, 30 percent for wants and 20 percent for savings or debt repayment.
- Cover essential needs like housing, utilities, groceries and health care before discretionary spending on wants.
- Adjust allocations based on income or expense changes to stay flexible and aligned with your financial goals.
Credit card debt is something many Americans know far too well. In fact, a recent Bankrate study found that 50 percent of people in the U.S. are carrying a credit card balance, and 58 percent of them don’t have a plan to pay it off.
While true emergencies are sometimes to blame, credit card debt is often a result of deciding to splurge. A surprising 38 percent of Americans say they would be willing to go into debt to have fun. Others unintentionally rack up debt by confusing “wants” and “needs.”
When having a casual conversation, have you ever found yourself saying things like, “I really need a coffee,” or “I need those shoes”? In most cases, these types of things are nice to have but aren’t true needs. Understanding the difference can go a long way toward improving your long-term financial health.
Whether you’re putting together a budget for the first time or making plans for your future, drawing a clear line between wants and needs will help you achieve your goals.
The difference between needs and wants
Distinguishing between wants and needs can be a challenge, especially in a marketing-driven society.
For example, many people were searching for the glasses they “needed” to view the 2024 solar eclipse to avoid retina damage. However, millions have viewed solar eclipses through pinhole projectors or by indirect viewing for thousands of years. So, by definition, solar viewing glasses aren’t a need, even if they can be an affordable and understandable want.
You may find it helpful to look at needs and wants through Maslow’s Hierarchy of Needs, a theory that categorizes human needs into five levels, progressing from basic to higher-order needs:
- Physiological: Essential for survival and includes air, water, food, shelter and sleep
- Safety: Physical safety, financial security and protection from harm
- Love and belonging: Social connections, intimate relationships and a sense of belonging
- Esteem: Recognition, respect and self-worth
- Self-actualization: Personal growth, fulfillment and the realization of potential
When it comes to economic needs vs. wants, there’s something important to remember: Money doesn’t buy love, belonging, esteem or self-actualization.
The simplest approach to distinguishing between wants and needs is to assess whether an expense is necessary for survival and safety or merely enhances your comfort or lifestyle.
When considering financial needs, ask yourself:
- Will this purchase contribute to my basic survival needs?
- Does this expense align with my immediate financial priorities?
- Is this purchase essential for my safety and security?
In personal finance, needs should always take precedence over wants. A list of essential expenses (needs) vs. discretionary spending (wants) can provide clarity and guide your spending, so you can make progress toward your goals even when your budget is tight.
Examples of needs in personal finance
Financial needs are essential expenses required to meet basic living standards. For example, you need to make sure your rent is paid and the power is on.
Needs include:
- Debt obligations: Payments on current student loans, credit cards, car loans and other debts
- Health care: Regular health check-ups, necessary medications and emergency medical care
- Housing: Rent or mortgage payments, required insurance, property taxes, maintenance and repairs
- Groceries: Basic, nutritious foods necessary for health and well-being (rather than luxury items or snacks)
- Transportation: Public transportation fares, gas, tolls, parking, vehicle maintenance and repairs
- Utilities: Electricity, gas, water, sewer, trash collection, basic phone services and internet
Prioritizing your needs can provide stability and security by ensuring you’ve got the basics covered.
You’ll also want to factor in needs that may not be immediate but are essential to maintaining a good financial footing. This includes things like keeping an emergency fund and a rainy day fund. Also, consider whether it makes sense to pay off your mortgage faster or start investing. While these aren’t urgent expenses, they’re important for building a more secure financial future.
Examples of wants in personal finance
On the other hand, financial wants are those extra purchases that aren’t necessary for survival but make life more enjoyable. Take, for instance, setting aside a little each month for ice cream. As long as your essential expenses are covered, there’s nothing wrong with indulging in a treat like this.
Common wants include:
- Dining out
- Entertainment
- Leisure activities
- Non-essential purchases (like gadgets or designer clothing)
- Travel
While wants can enhance your quality of life, they should be managed within the constraints of a budget to avoid overextending yourself.
Can a need also be a want?
Needs and wants aren’t always mutually exclusive. A need can also be a want when it fulfills the necessity for survival and safety as well as the desire for comfort or enjoyment.
For example, housing provides essential shelter, but the type of housing chosen may also cater to your individual preferences for amenities or location. Likewise, while nutritious food is necessary for sustenance, your preferences for dining and cuisine can also influence food choices.
In essence, when an expense serves both a fundamental need and a personal preference, it qualifies as both a need and a want, blurring the distinction between them. Recognizing these dual aspects can help you make balanced decisions with your budget and expense priorities.
How to budget for wants and needs
A popular budgeting method that balances needs and wants is the 50/30/20 rule. Under this framework, you allocate 50 percent of your income toward needs, 30 percent toward wants and 20 percent toward savings or debt repayment. This approach ensures that essential expenses are covered before discretionary spending and savings goals.
Start by listing all your monthly expenses and categorizing them as needs or wants. Fixed expenses like rent or mortgage payments fall under needs, while variable expenses like dining out or shopping fall under wants. Allocate your income accordingly, ensuring that essential needs are prioritized before discretionary wants.
Here’s an example budget for a fixed income of $3,000 based on the 50/30/20 rule:
Total Expenses: $3,000
Practical tips to decide if an item is a need or a want
When faced with gray areas like deciding on major purchases such as a car, it’s essential to approach the decision-making process with clarity.
Ask yourself the following questions:
- Is it helpful for my daily life?
- Can I afford it without sacrificing essentials?
- Are there more economical alternatives that could help me achieve the same outcome?
- Does it align with my long-term goals?
First, decide if the item serves a fundamental purpose in your life. Reliable transportation for work or family obligations would be a great example. However, you may or may not have access to a less expensive alternative like public transportation or a used vehicle.
Next, assess whether paying for a product or service would compromise essential needs like housing, utilities or health care. Make sure the purchase fits comfortably within your budget and look for alternatives that might cost less.
Finally, consider how the item or experience fits into your overall financial plan. Will it contribute to your well-being and long-term financial stability, or does it represent a desire for convenience or luxury?
By approaching gray areas with practical considerations, you can make decisions that balance wants with essential needs and support your financial health and long-term goals.
How to simplify the prioritization process
When overwhelmed by multiple financial goals, it helps to simplify your approach: identify the most pressing or beneficial goal and dedicate your efforts there first. This focused strategy helps prevent distraction and makes it easier to achieve success one step at a time.
When introducing a new financial habit or routine, anticipate the needed commitment. Decide in advance what you’re willing to sacrifice to accommodate it. For example, to save more, consider cutting back on dining out or entertainment expenses. Or, if you already have an established financial routine, pinpoint an aspect to prioritize.
For instance, if you’re budgeting, you might prioritize allocating a larger portion toward debt repayment or emergency savings.
As you make plans, make sure to stick with at least minimum payments on any debts you have. Keep an eye on your credit report, dispute incorrect items as necessary and consider working with a credit repair company if you’ve fallen significantly behind.
Next steps
Understanding the difference between needs and wants will help you make choices that support your financial health and stability. These concepts might blur together in casual chats, but when it comes to spending decisions, recognizing the difference is a key to smart financial management.
Start by looking closely at where your money goes each month. Use a budgeting approach like the 50/30/20 rule to distribute your income wisely. Always take care of your essential expenses first and make a habit of revisiting and refining your budget regularly to keep it in sync with your financial objectives.
By getting a firm grip on what you truly need vs. what you desire, you set yourself on the path to financial success.
