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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 find a financial advisor who can help you build a financial plan.

Needs vs. Wants: What’s the Difference?

As you might expect, a need is anything that you genuinely have to have. These are essential things that you cannot go any significant period of time without. Food, shelter, and transportation fall into this category. They are the basics of daily living.

On the other hand, a want is essentially something that enhances your life and that you’d like to have, but that you can get away without having. You should be able to cut wants out of your life without significant or long-term disruption. You might miss dining out, going on vacation or buying new clothes that catch your eye, but you could do without them if you needed to.

These opposing categories are a good starting point for anyone who’s building a budget. But don’t forget that wants and needs may be different for any given individual. For example, a professional who is expected to wear a suit to work every day would consider such formal wear a need, as it’s essential to their career. Conversely, someone who simply likes getting dressed up would consider such clothing expenditures a want.

In the table below, we go into further detail regarding needs and wants:

Comparing Wants and Needs

Type of CostNeed?Want?
Housing, mortgage payments and utilities
Eating out
Designer clothing

Explaining the Overlap Between Wants and Needs

SmartAsset: Understanding Needs vs. Wants for Your Budget

Your rent or mortgage payment is absolutely a need, as are basic groceries, transportation to and from work, clothing and utilities like water and heat. Healthcare is also a need (though that, too, depends on your personal situation, and many young people skip health insurance or buy a cheap policy). In theory, you could survive just fine if all you had were these basics.

However, it’s important to remember that there’s a lot of gray area when it comes to classifying needs and wants. Here are three examples:

  • While food certainly qualifies as a need, a dinner at a fancy steakhouse would clearly fall into the “want” column. But what about buying more expensive brands at the grocery store, or buying prepared food rather than getting ingredients and cooking yourself?
  • No one would dispute that transportation – whether a subway pass or a car – is a need, insofar as it allows you to get to work, take your children to school, and so on. Buying a flashy sports car would probably qualify as a want, especially if you’ve already got a perfectly good vehicle. But what about regularly taking cabs because it’s a little faster than the train? Or buying a new car because your old one broke down, but splurging on leather seats and other optional features?
  • Clothes, too, are a need, but they can quickly fall into the want category if you’re splurging on expensive brands or buying outfits you’re only going to wear a couple of times. At the same time, no one would suggest that you need to dress in rags or exclusively shop at thrift shops, especially if proper presentation is important for your career.

Clearly there’s plenty of grey area between needs and wants. Even a need as simple as shelter can drift into this grey area if you’re spending far too much on rent or a mortgage so you can live in a larger home or in a more upscale area. Ultimately, it’s up to you to decide what falls into which category.

You can even split up a given expense. For instance, if the average rent in your city is $1,500 but you pay $2,000 so you can live near the park, you might put the first $1,500 in the “need” column and consider the remaining $500 as a luxury.

As you do so, the important thing is to avoid falling into the trap of overspending on wants under the guise of filling basic needs. If you succumb to this pressure, you’re only hurting yourself by wasting your hard-earned money. Although it’s okay to occasionally spoil yourself, doing so regularly could result in long-term financial issues.

How to Budget for Needs and Wants

SmartAsset: Understanding Needs vs. Wants for Your Budget

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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