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Objectivity is key in making sure that you’re properly classifying needs and wants. When setting a budget, it’s important to differentiate between what you need and what you want. Indeed, many budgeting systems ask you to assign percentages to your needs and wants. For instance, the 50/30/20 budget popularized by Elizabeth Warren recommends putting 50% of your budget to “needs” and 30% to “wants.”
But what actually constitutes a need or a want? Before you start building a budget, it’s crucial to understand what really fits into each of these categories, and to honestly and objectively evaluate your spending habits. You might also find it helpful to find a financial advisor in your area who can build you a financial plan.
Needs vs. Wants: What’s the Difference?
As you might expect, a need is anything that you genuinely have to have. These are essential things that you cannot go any significant period of time without. Food, shelter, and transportation fall into this category. They are the basics of daily living.
On the other hand, a want is essentially something that enhances your life and that you’d like to have, but that you can get away without having. You should be able to cut wants out of your life without significant or long-term disruption. You might miss dining out, going on vacation or buying new clothes that catch your eye, but you could do without them if you needed to.
These opposing categories are a good starting point for anyone who’s building a budget. But don’t forget that wants and needs may be different for any given individual. For example, a professional who is expected to wear a suit to work every day would consider such formal wear a need, as it’s essential to their career. Conversely, someone who simply likes getting dressed up would consider such clothing expenditures a want.
How to Budget for Needs and Wants
By following the 50-30-20 rule, you can simplify your budget. It states that 50% and 30% of your budget should go towards needs and wants, respectively, with the remaining 20% designated for your savings or to pay off your debt. These limits aren’t exact, but if you find yourself spending too much in any one of them, consider redoing your budget.
It might seem that minimizing your spending on wants is the goal of this philosophy. In reality, though, the objective is to reach a healthier balance within your spending habits. Just because you classify an expense as a want doesn’t mean that you shouldn’t be spending money on it. As long as you’re properly managing your budget, you can meet your needs while still enjoying your wants.
If you find that you aren’t allocating your budget in a healthy way, move things around. Many people find themselves spending too much on unnecessary items and forgoing certain needs on a monthly basis. If that’s the case, you don’t have to give up your wants. Try going on less expensive vacations, or only eating out on certain days of the week.
Finally, make sure that you regularly review your spending and properly allocate money for needs and wants in a budget-healthy way.
Culled from Smartasset.
