One of the most fundamental aspects of creating your personal budget is sorting out the needs vs wants dilemma. Most budgeting and personal finance guides will tell you that you should sort your expenses into these two categories, but to do this, you must first have a good understanding of the meaning of needs and wants.
Once you know how to identify the differences between needs and wants, you will be able to create a more effective personal budget. So, without any further delay, let’s get right into the details and see how you should account for needs vs wants in your financial plan.
Wants vs Needs - Keeping it Simple
Wants can be classified as all those things that are "good to have" in your life. This can be a new car, an exotic trip, or going to the latest concert. When you spend on wants, you spend on the things you'd like in your life. Needs on the other hand, are "must haves" in your life. A secure place to stay, electricity, wifi, food, all fall in your needs. When you spend on needs, you spend on the necessities in your life. A good way to differentiate the two is knowing the differencing between needing clothes to cover you up and keep you warm, and wanting clothes from the latest drop of your favourite brand.
Needs — as you may gathered — are the things that you absolutely cannot do without. They are those goods and services that you must have to lead a decent life. The most common needs are air, food, water, clothing and shelter. Without these basic necessities, your life may be extremely challenging or downright hard.
The costs that you incur to take care of your basic needs and necessities are grouped in this category. Check out some common examples of needs below.
This includes your grocery, provisions and other necessary food costs.
This includes your home rent or home loan EMI payments.
In this category, we have your basic clothing needs, the cost of your essential footwear and your work clothes.
Utilities include your water, electricity and other utility bills.
Any loan EMIs, mortgage payments or other credit card liabilities fall in this category.
Wants, or discretionary expenses, are the things that you don’t really need. They are the costs of the products and services that you would like to have. If it comes down to it, you can eliminate all the wants or inessential expenses from your budget and still lead a fairly comfortable life.
The easiest answer to this is that any expense that is not categorised as a need is grouped as a want. But to make the concept of wants vs needs clearer, we’ll have to go over some common examples of wants.
While basic food is a necessity, some food expenses, like the cost of dining at high end restaurants or everyday takeaways can be discretionary rather than essential.
This category includes expenses like movie tickets, concert tickets, the cost of visiting theme parks or any other kind of entertainment.
Any premium purchases you make, like a smartphone, a gadget, an expensive suit or premium products and services are also classified as wants.
Travel can be fun, but the truth is, it is not a necessary expense. The cost of travel tickets, accommodation and other activities you do on vacation are also classified as wants.
Any subscriptions to magazines, e-zines, gym memberships and the like are also wants rather than needs.
Once you’ve identified the difference between needs and wants, you need to understand how to budget for both these kinds of expenses. Here are some steps that you can follow to account for them better in your personal financial plan.
The first thing you need to do is write down everything you tend to spend on. You can take a couple of months to do this exercise, so you can get a more comprehensive list of all the expenses you tend to incur. Make sure you write down the expense head as well as the amount.
Once you have a record of the expenses you typically incur from one month to the next, you need to start grouping them into two categories — namely needs and wants. As we’ve gone over the meaning of needs and wants in the sections above, this should be easier now.
You then need to go over the expenses you’ve classified as essential and ensure that they really are needs, rather than wants. Revisit these costs and ask yourself if it would really be impossible to live without the products or services concerned.
After you’ve effectively sorted your expenses into needs and wants, you can check which of your discretionary spends you can eliminate or reduce to a certain extent. Doing this will help you save up more money at the end of each month, so you can achieve your financial goals sooner rather than later.
Well, this should give you a fair idea of the meaning of needs and wants, and how they differ from one another. While you must focus on reducing as many of your discretionary spends (or wants) as possible, it is not necessary to eliminate them altogether. If you have some disposable income left at the end of each month, it is perfectly acceptable to reward yourself a little bit. That said, your essential expenses should always be prioritised, so you don’t have to resort to debt to meet these needs.
Some common examples of needs or essential expenses include your monthly food and grocery costs, your rental expenses, utility costs, internet expenses and the cost of fuel. These are expenses that you absolutely cannot put off, and they are necessary for your everyday survival and requirements.
Wants, on the other hand, are more discretionary in nature. They are easily avoidable if you absolutely need to cut down on your monthly expenses. Some common examples of wants are the costs of dining in at restaurants, any premium gadget or furniture purchases and the cost of movie or concert tickets.
Needs are things that you absolutely should have, and wants are things that you would like to have. The 5 most important needs for everybody include air, food, water, clothing and shelter. The costs of procuring these needs are typically prioritised in any personal budget.