Understanding Needs vs. Wants for Your Budget

When setting a budget, it’s important to differentiate between what you need and what you want. Indeed, many budgeting systems ask you to assign percentages to your needs and wants. For instance, the 50/30/20 budget popularized by Elizabeth Warren recommends putting 50% of your budget to “needs” and 30% to “wants.” But what constitutes a need or a want? Before you start building a budget, it’s crucial to understand what really fits into each of these categories, and to honestly and objectively evaluate your spending habits. You might also find it helpful to work with a financial advisor who can help you build a financial plan.

Needs vs. Wants: What’s the Difference?

A need is something essential that you can’t go without for an extended period of time. These are the basics required for daily life, such as food, shelter and transportation.

In contrast, a want is something that improves your quality of life but isn’t necessary for survival. While you might enjoy things like dining out, vacations or buying new clothes, these are luxuries you can forgo without major long-term consequences.

Understanding the difference between needs and wants is a crucial step when creating a budget. However, it’s important to recognize that these categories can vary from person to person.

For instance, a professional who must wear a suit daily for work would consider formal attire a need, while someone who simply enjoys dressing up might see it as a want.

The following table goes into further detail regarding needs and wants:

Comparing Wants and Needs

Explaining the Overlap Between Wants and Needs

Your rent or mortgage payment is undeniably a necessity, as are essential groceries, transportation to and from work, clothing, and utilities like water and heat. Healthcare is also a basic need, though this can vary depending on your personal situation — some younger people might skip health insurance or opt for a low-cost plan. Theoretically, you could live comfortably if you only had to cover these essentials.

However, distinguishing between needs and wants isn’t always black and white. Consider these three examples:

• While food is a necessity, dining at an upscale steakhouse clearly falls into the “want” category. But what about choosing higher-end grocery brands or purchasing prepared meals instead of cooking from scratch?
• Transportation, whether it’s a subway pass or a car, is essential for getting to work, school or other important places. Splurging on a flashy sports car when you already have a reliable vehicle is a clear “want.” But what if you frequently take taxis because it’s quicker than public transportation? Or if your car breaks down and you buy a new one with added luxury features, like leather seats?
• Clothing is also a necessity, but it can shift into the “want” zone if you’re spending on expensive brands or items you’ll only wear a few times. That said, no one expects you to wear outdated or second-hand clothes if your appearance is crucial for your job.

There’s often a fine line between needs and wants. Even housing, a fundamental need, can blur into a “want” if you’re overspending on rent or a mortgage just to live in a larger home or a more desirable neighborhood. Ultimately, it’s up to you to decide where to draw that line.

In some cases, you might divide an expense. For example, if the average rent in your area is $1,500 and you choose to pay $2,000 to live near a park, you could consider the first $1,500 a “need” and the additional $500 a “want.”

The key is to avoid justifying overspending on wants by categorizing them as needs. Doing so can lead to wasted money and hurt your financial health in the long run. While it’s okay to treat yourself occasionally, making it a habit could lead to serious financial issues over time.

How to Budget for Needs and Wants

By following the 50-30-20 rule, you can simplify your budget. It states that 50% and 30% of your budget should go towards needs and wants, respectively, with the remaining 20% designated for your savings or to pay off your debt. These limits aren’t exact, but if you find yourself spending too much in any one of them, consider redoing your budget.

It might seem that minimizing your spending on wants is the goal of this philosophy. In reality, though, the objective is to reach a healthier balance within your spending habits. Just because you classify an expense as a want doesn’t mean that you shouldn’t be spending money on it. As long as you’re properly managing your budget, you can meet your needs while still enjoying your wants.

If you find that you aren’t allocating your budget in a healthy way, move things around. Many people find themselves spending too much on unnecessary items and forgoing certain needs on a monthly basis. If that’s the case, you don’t have to give up your wants. Try going on less expensive vacations, or only eating out on certain days of the week.

Bottom Line

Objectivity is key in making sure that you’re properly classifying needs and wants. While lots of the things Americans spend money on every day might feel like necessities, we tend to spend a significant chunk of our budgets on wants. Make sure that you regularly review your spending and properly allocate money for needs and wants in a budget-healthy way.

Tips for Budgeting Your Money

• Aside from needs and wants, expenses can also be split into “fixed” and “variable” categories. By organizing your budget this way, you can begin to figure out exactly what your costs will look like on a month-to-month basis.
• When budgeting, it might be helpful to have a financial advisor optimize your financial plans to make sure you’re still on track for long-term goals like retirement. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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