The foundation of successfully managing your finances is budgeting, and a pillar of budgeting is learning to distinguish your needs from your wants. If you can’t differentiate those, you could wind up overspending on luxuries that you can’t afford.
Take this quiz to learn your money-spending personality, then read on for tips to help you save money by discerning wants from needs.
Why Should you Budget for Your Wants?
You might think like this: if something makes you happy, why should you deny yourself? Haven’t you earned that indulgence for working hard every day?
The problem with this mentality is that it can quickly develop into a habit that’s hard to break when you should be saving money for long-term expenses like a down payment on a house or repaying debt.
Immediate, fleeting indulgences can rapidly consume your bank account and dictate your spending habits. Plus, many of these momentary desires can be discarded and forgotten quickly after you buy them.
If you want to successfully plan and achieve your long-term lifestyle goals, you need to identify and control your inessential expenditures.
How to Tell Wants from Needs
Courtney Jespersen of NerdWallet has a great technique to identify your essential needs: if removing a particular expenditure would directly impact your ability to live or work, that expense is probably a need.
She identifies the most common needs to be housing, transportation, insurance, home utilities and food.
Wants, on the other hand, are “expenses that help you live more comfortably,” according to Jespersen.
You could cut these expenditures and still live and work as you currently do, just not as indulgently.
The Grey Area Between Wants and Needs
Separating wants from needs isn’t necessarily a black-and-white matter. Oftentimes, expenses are on a sliding scale that make distinguishing them challenging.
For instance, a car is an important need for many people so they can commute to work and buy groceries, but the actual vehicle you choose and its amenities can become a want if they’re extravagant. The same goes for other expenses, such as food. Sustenance is a need, but that prime rib isn’t.
Drawing a Line
As Paula Pant of The Balance points out, it’s hard for a person to see their own wants as anything other than a need, especially if you’ve grown accustomed to having that luxury on a daily basis.
This could include things like your streaming video subscription, morning coffee, makeup, internet service or even your smartphone (some companies do still offer pre-paid basic phones).
It’s hard to think of your life without these amenities, but unless their removal directly hinders your ability to do your job or remain alive, you should budget for these expenses as non-essential.
If you’re struggling to figure out what expenses are non-essential, consult a friend whom you trust and consider financially savvy. A neutral third party can bring an unbiased perspective to your spending habits that you can’t on your own.
Budgeting for Wants
Pant suggests following a 50/30/20 budget: 50 percent of post-tax monthly income goes to needs, 30 percent to wants and 20 percent to savings/debt reduction.
While you shouldn’t cut every single want you desire, limiting how much of them you buy every month forces you to prioritize which are more worthwhile to you. You’re prioritizing based on satisfaction, not just desire.
That’s an important note to make: It’s OK to include room in your budget for some wants. Sticking to a strict, no-frills budget for months or years is nearly impossible for most people, and it can make you miserable.
If you have some money to spare, don’t be afraid to treat yourself now and then to something you really enjoy. And when you build these occasional purchases into your budget, you’ll already know how much you can afford to spend on them.
Plan Your Way to a Financially Secure Future
Being smart with your money is essential to achieving your financial goals and living the life you want.
Don’t know where to start? Our financial advisors are experts in identifying your unique situation and helping you make the most of your money – now and for the future. Contact our team today and get started on the path to a fulfilling future.