You’re wandering through the mall and a cute pair of boots or sharp-looking jacket catches your eye. “Oh my gosh, I absolutely need that,” you say to your friend—or just think to yourself quietly, already hauling out your wallet.
But do you really need it? Or is it more of an “I would very, very much like to have that” situation?
Determining Needs vs. Wants?
It might sound like a simple task, sussing out your financial needs versus your wants. But this seemingly black-or-white issue can actually get surprisingly gray, depending on your situation.
After all, if you live in a place where the weather gets cold, you do need warm clothing to survive the winter season. But that doesn’t necessarily mean you need a high-end, name-brand leather jacket.
This post will review some of the most common financial needs and list examples of wants to help you determine the differences in your own budget, while offering a few tips on ways you can set yourself up for improved financial wellness by gauging your spending.
The good news is, you’ve got plenty of tools in your arsenal to figure out where to draw your own needs vs. wants line—and to help you budget the cash you need to splurge when you really want to.
As you probably remember from grade school—humans need certain things in order to survive and thrive. And while stuff like “self-esteem” and “inclusion” have a place on Maslow’s hierarchy, money, unfortunately, can’t buy them, no matter how hard some people try to convince themselves otherwise.
But money can take care of many of our physical needs, like food and shelter. And unless Universal Basic Income actually becomes a thing sometime soon, you do have to budget for the things you actually, physically need… and chances are, it’s going to take a pretty hefty bite out of your paycheck.
There are also things that you could technically survive without, but which you need in order to operate as a functional, productive member of society—and to keep that job that’s getting you the paycheck you need to buy food.
For example, if you work a position that requires you to show up at a specific time and place, transportation is going to be a need, not a want.
Since life is unpredictable (and in many places it’s legally required), you can count insurance as a need. And if you don’t want to go to jail for indecent exposure, you definitely need some clothing.
Examples of Needs
Here are some common budget items that typically count as needs:
• Rent or mortgage payment (shelter)
• Gas and electricity (heat)
Wants—Which Are Still Important!
Even when all of our needs are met, we may find ourselves desiring more things that money can buy. And although money can’t buy happiness itself, it can sometimes get us closer by funding the experiences of pleasure and comfort!
Just because you don’t absolutely need something doesn’t mean it’s not a worthy use of your money. After all, you work hard for your income, and you’re allowed to spend it on “frivolous” things if you want to.
It’s all about budgeting to ensure those extra expenses aren’t going to send you off the rails—which may not best serve your overall quality of life in the long run.
Examples of Wants
Here are some commonly-desired expenses that count as wants rather than needs.
• Entertainment costs, such as concert or movie tickets, or at-home entertainment goods like video game systems
• Travel expenses
• High-end clothing
• Fancy cars
• Fitness classes or gym memberships
• Hobby-related expenses
• Restaurant meals and coffee shop drinks
Again, just because you don’t necessarily need to have these things to survive doesn’t mean you have to feel bad if you buy them! Splurging on wants can be part of a healthy financial lifestyle, so long as you budget for it ahead of time.
What becomes problematic is when we overspend on wants with money we don’t actually have—i.e., a credit card. Since some credit cards carry high-interest rates, this practice can quickly lead to an ugly debt spiral, making it harder to purchase other wants or even take care of our needs.
That’s why it’s important to track your spending and ensure you have a plan for your money before it makes up its own mind.
Gray Areas and Decreasing the Cost of Needs
As you may have already surmised on your own, categorizing your expenses into needs and wants isn’t always a perfect system. There are some situations where these black and white divisions get a little gray.
For example, while, yes, you need both food and clothing, how much you have to spend on those items is highly variable. There’s a big difference between surviving on ramen noodles and shopping exclusively at Whole Foods.
And unless you work construction or make your living on a ranch, chances are you don’t really need a new pair of boots, specifically.
On the other hand, you may be in a position where you do actually need some items that might otherwise seem excessive. For example, maybe your job requires a certain dress code, and you can’t find the specific pieces you need at the thrift store.
Or maybe your work is technical and requires a high-powered computer. The good news is, some employers offer expense reimbursements as part of their benefits packages, and if you’re a freelancer or small business owner, and file a self employed tax return your business-related expenses may qualify as tax deductible.
The grayness of these category lines can actually be a positive thing—because it means you can find ways to minimize the cost of the needs in your budget. For example, although you do need housing of some kind, you could opt to rent a room in a house with multiple residents rather than springing for a luxurious, private downtown apartment.
While you don’t have to live on bread and water, you can choose to eat in more often, and make basic, batch-cooked meals created around inexpensive staples.
When it comes to transportation, you could opt for public transit rather than owning your own car, which can quickly become a weighty expense after gas, maintenance, insurance, and registration—not to mention the monthly car payment you’ll make if you don’t have the cash to buy it outright.
If you live in a metropolitan area or close to your workplace, you can also explore walking or biking to get around, or carpool with friends to both save cash and help the environment.
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Making a Budget
Even if you have a great sense of the difference between needs and wants, that won’t necessarily help you reach your financial goals or save for big expenses. To do that, you need a budget—and creating one can be a daunting task for a beginner.
But when it comes down to it, budgeting can actually be a lot of fun. That’s because it’s all about figuring out your personal priorities, and moving your money around until your actual experience matches your ideal experience. That’s pretty darn liberating, right? Let’s explore ways to actually do it.
Taking Care of Your Needs—Including Savings
Along with the regular, revolving needs mentioned earlier, there’s another important financial need we haven’t touched on: savings. It’s critical to build up an emergency fund to carry you if you should lose your job or encounter an unexpected expense or three, and if you look forward to retirement, you likely need to build up an appreciable nest egg while you’re still working. You can start saving for retirement today with an online IRA from SoFi invest. You’ll get access to a broad range of investment options, member services, and our robust suite of planning and investment tools.
One common piece of financial advice is the 50/30/20 rule, which was actually originally popularized by Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi, in their 2005 book All Your Worth: The Ultimate Lifetime Money Plan. In short, they recommended allocating 50% of your budget for needs, 30% for wants, and stashing the remaining 20% into savings.
Of course, if you actually expect to see 20% of your money go towards savings, you’ll likely need to make those contributions first—not at the end of the month, once you’ve already spent everything else in your coffers.
It’s all too easy to fritter away the money that would have gone to savings on wants, especially if you’ve already gotten your needs taken care of.
Note that this rule of thumb allocates a full 30% of your budget for wants—that’s about a third of your income!
Of course, keep in mind that this category has to include everything but the bare bones basics, including your Netflix membership and your unlimited cell phone data plan… so it doesn’t necessarily translate immediately into luxurious trips to the tropics.
It’s also worth mentioning that the 50/20/30 plan includes debt repayment in the 20% “savings” category—which means chipping away at your student loans or car payment don’t have to eat into the other portions of your budget.
That said, debt, and the interest it accrues, is an anchor that can slow down your overall financial journey, and compound interest works best with an ample dose of time on its side.
Ideally, you still want to be able to contribute to your retirement accounts as early as possible… and also create a tappable cash cushion for emergencies. Typical wisdom suggests keeping between three and six months of living expenses in an accessible manner, like an interest-accruing savings account.
Want to Automate Your Needs, Wants, and More?
As you can see, the needs vs. wants equation can be a little more complicated than it seems on its surface. But that doesn’t mean you can’t master it and build a budget that works for your personal priorities!
Whether you want to learn to change your spending habits so you can focus on repaying your debt more quickly or you’re trying to figure out how to save up for an epic vacation or becoming a homeowner, personal finance is just that: personal. How you want to spend your money is all up to you.
If all of this sounds overwhelming, a checking and savings account with SoFi may be able to help.
With a SoFi Checking and Savings account, you can save, spend, and earn up to 2.50% APY all in one product. Plus, you can track your spending in the weekly dashboard within the app. From the convenience of your smartphone, you’ll be able to track your spending.
Want to learn more about how SoFi Checking and Savings can help you organize your money for needs, wants, and savings?
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