Understanding the Difference Between Needs and Wants
Every purchase you make falls into one of two categories: a need or a want.
Understanding the difference between needs and wants is important for creating a budget and sticking to it, but drawing the line between the two isn’t always easy.
Needs are the essentials required for your survival, including food, clothing, shelter, and basic health care. They could also include resources required for your job, such as transportation or paying off debts.
Wants, on the other hand, are nice to have, but aren’t necessary to live. Wants often increase your quality of life, but are not needed for basic survival.1
While needs should always take priority in your budget, distinguishing between the two might require some thought and reflection on your finances.
Why Knowing the Distinction Matters
Understanding the distinction between needs and wants will directly impact your financial health and ability to meet financial goals.
Categorizing your expenses will help you:
- Make sure all bills and debts are paid before spending on non-essential items.
- Find areas to cut back when saving for big goals, like paying off student loans or saving for a home.
- Reduce financial stress by keeping you in control of your spending.
- Spend money intentionally in a way that aligns with your priorities.
For example, if your goal is to save 3-6 months of expenses in an emergency fund by the end of the year, knowing which expenses are essential will help you decide how much you need to save, and which categories you can reduce spending in to reach your goal faster.
Defining Needs in Financial Terms
Needs are made up of all the things that are required for your survival, no matter your income or financial situation.
Non-negotiable expenses often include:
- Housing (rent or mortgage, plus utilities)
- Groceries
- Insurance (health care, car, rental, etc.)
- Basic clothing
- Transportation for work
- Minimum debt payments
Your needs should account for around 50% of your overall income and budget. Review your spending from the last few months and highlight which expenses are considered true needs. If you find that you are spending more than 60% of your income on needs, there may be some areas where needs have become inflated wants.2
For example, you may need a car to get to work, but do you have an expensive car loan that is eating up your monthly budget? Knowing how much of your monthly income is going towards needs is a great first step towards building a budget and deciding how much you can spend on wants.
Understanding Wants in a Financial Context
Wants are the purchases that often improve your quality of life, but are not considered essential to survive.
This could include:
- Restaurant meals or takeout
- Subscriptions
- Vacation and travel
- Non-essential or luxury clothing
- Hobby-related expenses
- Premium versions of basic items
You will notice that some needs fall into the want category. For example, groceries are considered a need, but shopping at specialty stores or buying premium foods is considered a want. You may need a basic phone plan or computer to do your job, but purchasing the latest model every year is a want.
Important
Wants are going to look different for everyone, and for some people may even be a need. For example, you could be required to have a gym membership to maintain your health or complete a job requirement, while for other people, a gym membership is a want.
Core Differences Between Needs and Wants
Essential vs. Non-Essential
Not meeting your essential needs could put your health, safety, and ability to earn an income at risk. Any purchases you make that have little to no impact on these factors are going to be non-essential.
Universality vs. Individuality
Needs are largely universal, such as food, and everyone across the world shares the same set of basic needs. Wants, however, can be a reflection of your individuality. They reflect your personal preferences, such as what you like to eat, how you like to dress, and what hobbies you enjoy.
Stability vs. Changeability
Needs will remain stable throughout your life, though the amounts you allocate towards them may vary. For example, when you are younger, you may spend less money on health care, but more on housing. These categories will likely reverse once you reach retirement age.
Fast Fact
Wants are going to evolve with your changing interests, income, and stages of life.
Identifying Your Purchases: Need or Want?
Outside of your budget, there are practical strategies you can use to help you determine if something is a need or a want in real time.
Before your next shopping trip, list what you need to buy ahead of time. Any item you pick up at the store that is not on that list is considered a want.
If you often impulse shop, set a 24-hour rule for non-urgent purchases. After a day has passed, revisit this item and see if you still want to buy it.
Ask yourself these questions before you head to the checkout counter:
- Is this essential for my basic survival or to complete my job?
- Do I already own something that serves this purpose?
- What problem does this solve?
- Would I still buy this if it cost 20% more?
- What are the short-term and long-term benefits of this purchase?
Keep a list of these questions in your wallet or on your phone for easy reference next time you shop.
Budgeting Essentials for Needs and Wants
Try one of these practical budgeting methods to help you distinguish between your wants and needs.
The 50/30/20 Budget Rule
One common budgeting approach is the 50/30/20 budget rule, where 50% of your income goes to your needs, 30% goes to your wants, and 20% goes towards savings, investing, or debt repayment.2
Cash Envelope System
If you have struggled with overspending on your credit card, create physical or digital envelopes for different spending categories. First, fill your needs envelopes with money. Then, allocate the remaining funds to your personalized want categories. Once an envelope is empty, stop spending money in that category.
You can also open separate bank accounts—one for your bills and other needs, and another for your wants. Set up direct deposit to automatically distribute your money and pay your bills when you receive a paycheck, and the rest will go into your spending account for wants.
The Bottom Line
At its core, distinguishing between needs and wants is about being more intentional with your money. Start by tracking one month of your shopping and expenses, labeling each item as a need or a want. This will help you paint a picture of your spending habits and identify areas where you can cut spending.
By clearly separating needs from wants and budgeting accordingly, you’ll have more control over your spending, reduce financial stress, and make progress toward your long-term financial goals.
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