How to budget for needs and wants — and know the difference

You might want that spiffy new dream car, but do you need it? Conversely, you might need to pay the electric bill or run to the grocery store, but do you really want to? 

When it comes to managing your finances, understanding the difference between needs and wants can take you a long way (much like the dream car). Making the distinction between wants and needs can help you make more intentional spending decisions, ensuring that your budget aligns with your financial goals. In this blog, we’ll provide an explanation of needs vs. wants, how to differentiate between the two, and tips for putting items in the correct columns when you’re budgeting.

Explanation of needs vs. wants

Here’s how to understand the difference between needs and wants in financial and purchasing decisions.

• Needs can be determined by identifying your own level of control in a purchase. Needs are the things you must purchase to be safe, healthy, to get back and forth to work and school, and to fully function. Needs have immediate consequences if they’re not paid and include things like food, shelter, clothing, healthcare, insurance, and transportation — and are financial obligations. Without needs being met, your basic well-being would be compromised.
• Wants, on the other hand, are everything else. The wants category in your budget is where you have the most control to decide what fits into your budget — and what doesn’t. Wants are nonessential items or services that enhance your quality of life. These include dining out, entertainment, vacations, luxury items, and more. While wants can enrich your life, they should be prioritized after your essential needs are all met.

How to identify needs vs. wants

Identifying needs vs. wants can sometimes be challenging, especially when emotions and societal pressures come into play. Here are some tips to help you distinguish between the two:

• Ask yourself the hard questions. When considering a purchase, ask yourself if the item is something you need to survive or if it’s something that would simply be nice to have. For example, do you need a new winter coat to stay warm, or are you seeking the latest fashion trend? (Hint: The most important part of asking these questions is giving yourself honest answers.)
• Evaluate the consequences. Consider the consequences of not having the item. If not having it would significantly impact your daily life or health, it’s likely a need. If it would only cause minor inconvenience or discomfort, it’s probably a want. Groceries are needs; ordering pizza instead of cooking and picking up daily morning lattes probably qualify as wants.
• Prioritize your spending. Make a list of your monthly expenses and categorize them into needs and wants. This will help you see where your money is going and adjust if necessary.

Budgeting needs vs. wants

Once you’ve identified your needs and wants, it’s time to create a budget that reflects these priorities. Here are some steps to help you budget effectively:

• Track your income and expenses. Start by tracking all your sources of income and your monthly expenses. This will give you a clear picture of your financial situation.
• Allocate funds for needs first. Ensure that your essential needs are covered before allocating money to your list of wants. This might mean cutting back on discretionary spending to ensure you have enough for necessities.
• Set financial goals. Establish short-term and long-term financial goals, such as saving for an emergency fund, paying off debt, or investing for the future. Allocate a portion of your budget toward these goals.
• Review and adjust regularly. Your financial situation and priorities may change over time, so it’s important to review your budget regularly and adjust as needed.

By understanding the difference between needs and wants and budgeting accordingly, you can take control of your finances and work toward a more secure financial future.