Pauline E. Ranger Sorting out your needs and wants is fundamental to creating a personal budget. Many budgeting and personal financial guides tell you to sort your expenses by conditions and wants. But before you can do that, you need to understand what these terms mean.
You will be better able to create an adequate budget once you understand the difference between wants and needs. Let’s jump right in and look at how to account for your needs vs. wants when creating a financial plan.
Could you keep it simple: Wants and Needs?
All those things in life that you “want to have” can be classified under the heading of wants. It could be a new vehicle, a trip to an exotic location, or if you want to go to the latest music concert. Spending on wants is a way to spend money on things that you want in your life. Needs are the “must-haves” of your life. Needs include a safe living place, electricity, WiFi, and food. Spending on necessities is what you do when you spend money on your needs. You can tell the difference between wanting to buy clothes that you love and need to wear to keep warm and covering up.
Determining your needs
As you might have guessed, needs are those things you cannot live without. You need these goods and services to live a decent, happy life. The most basic needs are air, food, shelter, water, and clothing. Your life can be very difficult or even impossible without these basic needs.
Which expenses should you include in your budget
This category includes the costs you incur for your necessities and needs. Below are some examples of everyday essentials.
Food
Included in this cost are your groceries, food, and other essentials.
Shelter
Included in this are your rent or EMI payments on your home loan.
Clothing
This category includes your essential clothing, footwear, and work clothes.
Utilities
Utility bills include water, electricity, and other utility charges.
Debt
This category includes any loan EMIs, mortgage payments, and other credit card obligations.
Define your wants
You can also call them discretionary expenditures. They are things you do not need. These are the prices of products and services you’d like to purchase. You can still live a comfortable life if you eliminate all wants and inessential costs from your budget.
Which expenses should you include in your list of wants
Let’s look at some examples to clarify the difference between wants and needs.
Food
Primary food is essential, but some expenses like dining out at a high-end restaurant or ordering takeout, can be considered discretionary.
Entertainment
Included in this category are expenses such as movie tickets, concert tickets, theme park tickets, or other entertainment.
Premium purchases
Wants to include any premium purchase, such as a smartphone, gadget, expensive suit, or exceptional services and products.
Travel costs
Travel can indeed be enjoyable, but it is not an essential expense. Travel tickets, accommodations, and other vacation activities are all classified as wants.
Memberships and subscriptions
Wants to include subscriptions to magazines and e-zines as well as gym memberships.
Budgeting needs vs. wants
After you have identified the differences between wants and needs, you must know how to budget both expenses. You can use these steps to better account for your desires and needs in your financial plan.
List all of your expensesWrite down all the expenses you are prone to incur. This exercise can be done over time to get a comprehensive list of your expenses. Be sure to write down both the expense heading and the amount.
Consider classifying them into needs and wants
You can now start to group your expenses into two main categories: needs and wants. This should be easy now that we have discussed the definitions of needs and want in the previous sections.
Double-check your needs
Then, you need to review the expenses that you have classified as essentials and make sure they are needs rather than wants. Re-evaluate these expenses and determine if you could live without them.
Find out which of your wants you can reduce or eliminate
You can then decide which discretionary expenses you want to eliminate or reduce. This will allow you to save more money each month and achieve your financial goals faster.
Summary
This should help you understand the difference between needs and wants. It is important to reduce as many discretionary expenditures as you can, but it’s not necessary that they are eliminated. It is acceptable to treat yourself at least a little if you still have some money left over each month. Prioritizing your essential costs will help you avoid going into debt.
What are some examples
Examples of essential or needs expenses include rent, utilities, Internet, and monthly food and groceries. You cannot avoid these expenses, as they are essential for your daily survival.
Wants are discretionary. If you need to reduce your monthly expenditures, they are easy to avoid. Wants to include the costs associated with dining out at restaurants, furniture or gadgets that are expensive, and movie or concert tickets.
What are the five basic needs
Wants are the things you’d like to have but don’t need. Air, food, shelter, water, and clothing are the five most important things for everyone. Prioritizing the costs associated with these necessities is a common practice in personal budgets.
