Needs vs Wants:
How To Budget For Them
And Win!

Differentiating needs vs wants is critical in today's consumer-driven world because it's so easy to get caught up in a never-ending cycle of desire.

We are bombarded with advertisements and social pressures that constantly tempt us to spend money on things we may not truly need. Understanding the difference between needs and wants and implementing proper budgeting strategies can empower individuals to take control of their finances and build a more secure future.

In this article, we will explore the concept of needs versus wants and discuss the importance of weaving them into your budgeting strategies to make financial headway.

Embracing the power of distinguishing needs vs wants to take control of our finances can achieve both short-term satisfaction and long-term financial security.

One of the most crucial steps you must take when creating a budget is outlining your spending according to whether it is a "need" or a "want".

While needs and wants may differ from person to person, the gist of it is to avoid mistaking one for the other.

Defining Needs vs Wants

Distinguishing between needs and wants is crucial when it comes to making effective financial decisions. Therefore, it is important to start with a common baseline of what each one is.

Needs are the essentials required for survival and basic well-being. These include items such as nutrition, shelter, clothing, healthcare, and transportation. Wants, on the other hand, are desires that are not essential for survival but could enhance our quality of life or give us pleasure and convenience.

Examples of wants can range from fancy dining to alluring cosmetics or the most recent iPhone when you already have a phone that works perfectly fine.

The Impact of Impulse Buying

Wants often drive us to do impulse buying, which is one of the major hurdles to achieving financial stability. Triggered by emotions or societal influences, impulse buying leads us to purchase things we want but do not necessarily need.

The thrill of the moment sometimes also fades quickly and could leave us with buyer's remorse while potentially harming our long-term financial goals. By recognizing the deleterious impact of impulse buying we can do a better job keeping our wants and desires in check and strengthen our finances.

Determining Needs

Financial needs are expenses that are genuinely necessary to be able to live and function. They constitute recurring expenses that we are unlikely to get around or do without.

They include essential nutrition, basic shelter, household energy use, transportation and insurance.

Identifying Wants

To certain people, wants can be impossible to distinguish from needs. As the level of partiality varies from one individual to the next, we must at least acknowledge when indulging a want and not convince ourselves that it is a need.

In financial terms, wants are defined as purchases for added comfort, for fulfilling desires, for enjoyment and what Italians call “la dolce vita” (the sweet life). Can you survive without them? Rationally yes, even if you can’t see yourself doing so.

These are examples of expenses that qualify are definite wants, not needs: Starbucks coffee, name brand clothing, premium gym membership, cable TV, fancy automobile, Caribbean Island vacation, high-end dining, just to name a few.

Without exception, you will survive going without these or opting for a less costly option. Do you want to? Probably not. There lies to trick of consciously separating instant vs delayed gratification. Can you indulge in your wants after you have better solidified your financial security? Absolutely. It’s a choice...

Saving, Investing, Insurance, Debt

Since you can survive not spending on savings, investing, insurance and debt, how do those fit in the wants vs needs paradigm?

Survival today is not enough if you make no provision for surviving tomorrow as well. Saving, investing, insurance and debt repayment are mechanisms in place to bolster your survival and the future of your loved ones. For that reason, they would qualify as needs for most people (although for some outliers, they might be considered unnecessary).

Needs vs Wants: Budgeting Techniques

Here are three effective budgeting techniques to help tackle purchase decision making between needs and wants.

Delayed Gratification

The easiest technique, delayed gratification, involves exercising patience and self-control when it comes to fulfilling wants. Instead of giving in to impulse buying, practice delaying the purchase of non-essential items. Set a waiting period, at least one day - and for life-changing purchases, even 30 days - before pulling the trigger.

During this waiting period, evaluate whether the purchase is truly essential or just a fleeting desire. Often, after some time has passed, the initial desire may fade, and reasoning might kick in, or you may find that you no longer want or need the item as much as you thought.

This technique allows you to avoid impulsive spending and make more deliberate and thoughtful choices about how you spend your money.

Delayed gratification is a technique that also provides you with an opportunity to save money specifically for the item you desire.

You can work towards purchasing the item of your choice without compromising attending to your basic needs, going into debt or wrecking your financial plans. You simply set aside a portion of your budget each month until you are able to make the purchase.

50/30/20 Rule

The 50/30/20 rule is a popular budgeting technique that allocates your after-tax income into three categories: needs, wants, and savings.

According to this rule:

• Allocate 50% of your income to cover essential needs such as rent/mortgage, utilities, groceries, transportation, and healthcare.
  
  
• Allocate 30% of your income for discretionary spending on wants such as dining out, entertainment, vacations, and luxury items.
  
  
• Allocate 20% of your income towards savings, including building an emergency fund, retirement savings, and other long-term financial goals.

This proven technique works for a lot of people and ensures that you prioritize your needs while still allowing for the fulfillment of wants within a reasonable limit. It also encourages regular savings to secure your financial future.

Prioritization and Decision Matrix

Now, if you want to “geek this out” this is the technique for you. It involves creating a decision matrix to evaluate and prioritize your expenses.

You start by listing all your potential wants and needs and assigning each item a score (0 to 10, or 0 to 100) based on its importance to you. Consider factors such as necessity, long-term benefits, and personal values.

For example, you may assign a higher score to healthcare expenses and education compared to dining out or buying new gadgets.

Next, calculate the cost of each item and divide it by the score you assigned to it to determine its value for money. This calculation helps you make informed decisions and prioritize your spending based on the highest value for the resources invested.

By using this technique, you can mathematically evaluate your wants and needs, ensuring that your budget aligns with your priorities and values.

No matter what technique floats your boat, the important thing is to learn to reevaluate your spending, to lessen your non-necessary or wasteful spending and allocate your resources more efficiently.

Most budgeting apps on the market will even break down your spending tendencies and make it easy for you to implement necessary adjustments. One of the easiest adjustments is to redefine your take on needs vs wants.

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