Struggling to stick to a budget but not sure why? I bet the cause is a matter of knowing a need vs wants.
It may be because you picked an arbitrary formula (like the 50/30/20 budget) and shoved your lifestyle inside without any tailoring.
But how we spend our money depends on how (and where) we live our lives and what we value. Which ultimately determine what we need to live a happy, healthy, meaningful life.
And this differs for every single one of us.
So to create a realistic personalized, it’s vital to identify how you personally define a need vs wants.
I’ll teach you how to do just that.
Defining Wants & Needs
Put simply:
A need is something that contributes to your overall well-being and basic survival. A want is a cherry on top of the life a basic need provides.
The following sections provide extra clarity, and examples of each.
“Needs” Explained (+24 Examples)
According to renowned psychologist A.H. Maslow, something is a need if a deficiency adversely impacts your health and overall well-being. For example, social interaction is a need because isolation can lead to both physical (i.e., heart disease) and mental (i.e., loneliness and psychosis) harm.
Needs have a long-term impact on your well-being.
From a financial perspective, costs that support a need may include:
- Shelter: rent, mortgage
- Communication: landline, mobile
- Utilities: electricity, water, sewage, gas
- Medical Care: medication, therapy, physician appointments, surgery, etc
- Food: pantry staples, protein, whole wheats, produce
- Uniforms: school, work
- Transportation Costs: vehicle, bus pass, bicycle, etc
- Clothing: basics to keep you warm, dry, and otherwise protected from the elements
- Savings: retirement, emergency fund
“Wants” Explained (+20 Examples)
Maslow’s theory further suggests that once we meet our basic survival needs, we aspire to growth needs, aka “wants.” A want represents a thing that makes life more enjoyable.
A key difference between a deficiency in wants and a deficiency in needs is that a deficiency in wants leads to nothing more harmful than temporary disappointment.
From a financial perspective, costs that represent a want may include:
- Entertainment: movies, video games, sporting events, concerts, etc.
- Food: restaurants, bars, junk food
- Home Goods: decor, smart home appliances
- Travel: for recreational enjoyment (i.e., not related to work or family)
- Electronics: laptops, video game consoles, televisions, sound systems
- TV/Streaming: cable, satellite tv, Netflix, Hulu, Disney+, etc
- Clothing: anything beyond the basics
How To Differentiate Need vs Wants To Build An Accurate Monthly Budget
But here’s the catch.
The generic lists of needs and wants above are just that, generic. In reality, and based on your individual lifestyle and values, some of those wants may actually be needs, and vice versa.
This is where budget personalization comes into play.
And you’re in luck because the following sections teach you step-by-step how to identify your spending idiosyncrasies.
Step 1. Gather The Deets
Before you divvy your expenses between needs and wants, you first need to gather your expense data.
To do so:
- Download the past 12 months of transaction data from your bank and credit card accounts. Or, if your financial standing has changed significantly over the past year, you can limit the data pull to the last three months.
- Categorize each transaction into the buckets indicated in the section above plus any particular to your lifestyle.
- Double-check categories for opportunities to further segment your spending. For example, does your grocery bucket include household items like cleaning supplies and toiletries that you buy at the grocery?
- To get your average monthly spending, total each section and divide by 12 (or 3).
And that’s it for this step! It may be a bit tedious, but it’s the only way to see your spending habits truly.
Step 2. Reflect
Now that you know how much you spend and where you spend it, it’s time to reflect on which categories are needs and which are wants.
For each category, ask yourself:
- Why does the expense exist in the first place? Do you need the highest of high-speed internets because you work from home or because you want a pristine viewing of Dateline?
- Does the category have a long-term impact on your well-being? Is your clothing spending high because you have to wear suits to work (long-term)? Or because you impulse shop (short-term)?
Be honest with yourself! Even if only grudgingly so.
Step 3. Segment Need vs Wants
Data gathered. ✓
Sorted. ✓
Reflected on. ✓
Time for the main event! Identifying your needs from your wants.
All you have to do is:
- Mark each category as a need or want based on your answers to Step 2. In general, an expense is a need if it contributes to your long-term health or well-being (including your career). Otherwise, it’s a want.
- Go through your list once more and ask yourself if a less expensive, or free, option would suffice. If so, it’s a want. If not, the category is likely a need for you.
Voila! Done.
BONUS: Let’s Get Personal (A Real-Life Example)
As an example of what a wants vs needs breakdown looks like in action, peep my personal lists below.
| Needs Bills, investment goals, and items I’ve tried to cut back on before but experienced adverse results | Wants Expenses I could cut completely, without consequence, if push came to shove. Almost all of my wants have cheaper or free options |
|---|---|
| -Apartment (Rent & Insurance) -Auto (Financing & Insurance) -Student Loans -Internet -Savings -Groceries -Pet -Side-Gig -Creative Hobbies -Wellness | -Gas -Gifts -Experiences With Loved Ones -Eating Out -Home Goods -Plants -Phone -Subscriptions -Clothes -Travel -Books -Miscellaneous |
| 77% | 23% |
You can also practice with this worksheet, produced by the Consumer Finance Protection Bureau.
Define Your Personal Need vs Wants. Check! Next Stop: Managing Your Budget
Bravo! You’ve now set a strong base for developing a personalized budget that works.
Take advantage of the momentum you’ve already built by putting together the final pieces of your budget. Everything you need to know is available in my budgeting and money management guide.