Honestly, budgeting can be tricky. Deciding what to budget for and what to leave out especially can be a challenge and a lot of that has to do with the distinction between wants and needs. Understanding the differences between wants and needs is a fundamental part of budgeting; a crucial step in understanding how to make good financial decisions, allocate resources judiciously, and secure financial well-being.
So here are 3 key differences to keep in mind.
Necessity vs. Luxury
One of the first distinctions is the line between necessity and luxury. Needs are essential to your basic survival. You need groceries for a healthy balanced diet. You need to pay your mortgage or a parent’s assisted living facility bill for a place to live. You need basic clothing suitable for your climate.
Wants, however, are items or experiences that enhance your life but are not critical to your survival. It’s nice to go on vacation, to the movies, or even to a concert. It feels great to wear high-end fashion items.
Thus, needs should always be your top financial priorities. You want to allocate funds for them before considering wants.
Stability vs. Flexibility
Another common distinction between needs and wants is by considering stability vs. flexibility. Your rent or mortgage payment is generally the same each month. Groceries and utility bills also often have consistent costs. Thus, needs are typically stable and recurring.
Wants, on the other hand, are often more flexible and variable. For example, your entertainment expenses likely fluctuate. One month you might spend more on concert tickets, while another month you could spend less by staying in and watching movies. Or how in a given month, you might choose to celebrate a special occasion by dining at an upscale restaurant while other times you might opt for more cost-effective dining options, ordering takeout instead of fine dining.
This is why you want to clear your recurring costs first – they’ll always be there – and learn to be flexible with your wants instead.
Long-term vs. Short-term
You don’t want to miss rent or utility payments because you know that means real consequences. So needs are generally ongoing and require long-term budgeting. You must consistently allocate funds for your needs to maintain a stable lifestyle.
In contrast, you can delay a vacation or reduce entertainment expenses during lean months without jeopardizing your basic needs because wants are often short-term desires that can be adjusted based on your financial situation.
Generally, it’s a good idea to think about the long term instead of the short term when you’re considering what to remove from your budget. Does it really affect your lifestyle in the long term?
By understanding these distinctions and applying them to your budget, you can make informed financial decisions, ensure your essential needs are met, and enjoy discretionary spending on your wants when your budget allows.