How Distinguishing Between Needs and Wants Can Help You Build a Better Budget
In order to create a budget that not only works, but that you can thrive on, it helps to consider your needs and wants. It can be hard initially to see any of your spending as a want because you can’t see your life without it. But if you take a step back and evaluate your needs and wants, you will find ways to budget better. This will have a positive impact on your financial life as a whole.
What is a Need?
A need is a good or service that you must have in order to survive. The number of needs a person has is limited. For the most part, needs are consistent from person to person. This category includes shelter, clothing, food, gas and electricity, transportation, and healthcare.
What is a Want?
A want is something that you desire to make your life better or more fulfilled, but doesn’t impact your immediate survival. Wants can include eating out, entertainment, travel, gym memberships, designer clothing, and anything else that you would like in your life. Unlike needs, which cover a more limited range of expenses, wants are limitless and vary greatly from person to person.
It’s important to remember that some basic expenses are a need but can also become wants depending on circumstances. Transportation, for example, is a need at the basic level. You need a subway pass or a car to get to work, get groceries, and take your kids to school. You don’t, however, need to go all of these places in a luxury car. That is a want.
Dividing Your Expenses
Now that you understand the difference, divide up your expenses as either needs or wants. To do this, look at all of your monthly spending and give each expense the category of need or want. Remember that you may need your cell phone to communicate, so it can be labeled a need. But no matter how much you feel like you can’t live without it, your streaming service is probably a want.
If you aren’t sure if an expense is a need or a want, it can help to think about it from a slightly different perspective. You can apply the MoSCoW model, which stands for Must have, Should have, Could have, Won’t have, to the expense. If the expense is a Must have, it is a need. If it is a Should have or a Could have, it is a want. But if it is a Won’t have, then you can cut it from your budget. As you work on your budget, you can prioritize the Should have spending over the Could have spending to incorporate your values into your budget.
Building Your Budget
Knowing the difference between your wants and your needs can help you develop a budget you can actually stick to. To start, define your income. This will let you know how much you can spend and save in a given month.
Next, budget for all your needs. Start by subtracting your necessary monthly spending from your income. Once all of your needs are accounted for, you can start adding your wants into your budget. Include your high-value wants into your budget first. This will allow you to cover the expenses on the things you really value before worrying about the things that aren’t as important.
A Few Things to Remember
Needs and wants can change over time as your circumstances change, so be flexible and consider your budget often.
Remember to factor debt repayment into your budget. It may not feel like a need, but to keep your credit score up, stay out of collections, and pay less interest over time, those payments still need to be made. Saving is also not necessarily a need or want, but something you should factor into your budget.
If you make sure that your needs are taken care of first, you will be able to use what is leftover to cover some of your wants. This will help you create a sustainable budget, move your personal finances forward, and reach your personal finance goals.