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Needs vs. Wants: A Guide for Budgeting

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These days many of us find ourselves spending more and more due to lifestyle inflation and impulse buying. This sometimes leads to overspending and, even when we do manage to avoid overspending, we may still be unable to save enough money each month. That’s where budgeting comes in. A good budget is the foundation of solid personal finance management.

It helps you divide your expenses, track where your money is going, live within your means, and understand the difference between needs and wants. That last bit – identifying whether an expense is a need or want is very important, so let’s take a look at the basics of budgeting with a focus on needs vs wants. We’ll see how you can avoid overspending, develop a habit of saving, and make better financial decisions by setting a budget.

Understanding Your Needs and Wants

A ‘need’ is an expense that is essential for survival – something you simply cannot do without. A ‘want’ on the other hand, is an expense that you need not make for basic living, but something that enhances the quality of your life. Needs are hence more important, and they take up the majority of our budget. 

Needs must also be prioritised above wants. Once the essential expenses are met, the rest of the income can be used for saving and spending. 

Now that you know the main difference between needs and wants, let’s take a few examples of each – 

Examples of needs (Essential expenses)

  • Rent or mortgage
  • Electricity and water bill
  • Commute to work
  • Groceries
  • Life and health insurance payments
  • Debt repayments

Examples of wants (Non-essential expenses)

  • Expensive clothes
  • Dining out
  • Vacationing
  • High-end electronics
  • Hobby expenses
  • Streaming subscriptions

These are just a few examples. But remember that these are also not set in stone. What is essential to you may be someone else’s luxury, and vice versa. Everyone is unique, and needs and wants can differ greatly from person to person depending on individual circumstances, priorities, and lifestyle. 

So it’s important to assess what your personal needs and wants are to make a practical budget. For example, people with intensive jobs may not get the time to make food themselves at home, so they frequently dine out or order food online. For such people, dining out is a need. However, for someone who has the time to cook at home, dining out can be considered a luxury. 

So how can you identify whether an expense is a need or want? Well, you can consider the following factors:

  • Whether or not you can survive without it
  • Whether or not it is essential for your safety or health
  • Whether or not it significantly improves your quality of life
  • Whether or not it is necessary for your job or education

Our income is limited, so it’s crucial to identify our needs vs wants clearly for making an effective budget.

Planning Your Expenses to Meet Essential Needs

Now that you know the difference between needs and wants, you can start planning for them. Between needs vs wants, priority while planning should always be given to needs as these expenses are essential for our survival. List down all your essential expenses and allocate a portion of your income to cover these costs first. 

Monitoring and adjusting the allocation is also important, because as your financial and personal circumstances change, you may find your wants become needs. For example, you may not have many essential expenses if you are an unmarried individual, but by the time you get married, your budget will need to accommodate extra expenses such as higher rent or mortgage payments, childcare, education, and increased bills.

Expenses from either the need or want category can be used to make cutbacks. You can cut down on your needs by moving into a house with cheaper rent, for instance. Most of the cuts however generally come from the wants section.

Planning Your Budget for Wants

Once your basic requirements are met, you can start planning for your wants. List down all your non-essential expenses, and identify where you can make cutbacks. This will make sure that you are spending within your means. 

Another difference between needs and wants is that you can limit the non-essential expenses, whereas you generally cannot compromise on your needs. You will need to eat food, but you don’t have to indulge in snacking. Set a percentage of your income that you can allocate towards wants so you can enjoy some luxuries of life without overspending, and find a balance between needs and wants. Once you can clearly identify which expense is a need or want, budgeting will become much easier. 

Also Read: What is Budgeting in Financial Management? A Complete Guide

Understanding the Overlap Between Wants and Needs

The difference between needs and wants can sometimes seem blurred because there can be a grey area between the two. That means you may find it hard to categorise some expenses as need or want. Here are a few examples of this overlap:

  • You would want to have a smartphone today, but there is a wide variety of them available at different price points. If you buy a cheap one, it may lag frequently and you may be forced to buy a new one sooner than you expect. The overlap here is between functionality and luxury. Would you break the bank for a high-end phone when a mid-range phone would do?
  • Air conditioners are often seen as a luxury, but in recent summers, temperatures have consistently hit 46+ degrees in many cities. In such extreme heat, one may not consider an AC a want but rather a need.
  • Sending your child to a school is a need, but sending your child to a prestigious and expensive school may be considered a want.
  • One may see high-end clothes, jewellery, and accessories as want, but for professionals who meet important clients every day, these items can be considered needs.

You can find examples of these overlaps everywhere. When you are considering needs vs wants for your budget, the line between the two might seem blurred in some cases. But a balance must be found to live a healthy financial life. A middle ground where your quality of life isn’t heavily sacrificed, and where you can function normally daily without overindulging in luxury. 

That’s why you must evaluate your personal needs and wants before creating a budget by considering the long-term impact of each expense. Would the purchase add value to your life in the long run or is it just a temporary desire? This evaluation can help you manage your finances better.

50/30/20 Budget Rule

One of the most popular and effective ways to allocate income is following the 50/30/20 budget rule. This rule divides your budget into three main categories – needs, wants, and savings. The way it works is simple, the rule states that your income (after taxes) should be allocated as follows:

  • 50% of your income should go towards taking care of your needs,
  • 30% of your income towards wants, and 
  • 20% of your income should be saved. 

Using the 50/30/20 rule has many advantages – 

  • It’s easy to use, and you don’t have to get into complex calculations to get started.
  • Helps you prioritise expenses.
  • Forces you to save money, which you can invest to realise your financial dreams.
  • Allows you to spend a significant chunk on your wants, so you can stay motivated to stick to the budget.
  • Lets you clearly outline the difference between needs and wants you have.
  • Helps you look at expenses individually and think before categorising them as needs vs wants.
  • Lets you track your spending so you can see where you are spending more and can make necessary adjustments.

Many people find it much easier to draw up a budget than actually following it. This is because sticking to a budget requires discipline. It requires you to change your long-held spending habits. This cannot be done overnight. This discipline is cultivated slowly as you learn to make cutbacks, control your impulse spending, track your expenses, and follow your financial plan. 

If you initially fail to stick to your budget for one month, that’s fine! Try and make up for it in the next. If you fail to stick to it for several months though, it may be time to reevaluate your budget, needs, and wants. 

Another major reason individuals give up on following their budget is because they make it too rigid. They enthusiastically create a framework that has too many cutbacks from wants and leaves little room for enjoyment. An overly restrictive budget can feel like a diet. 

Most diets fail because individuals focus on short-term restrictions on food rather than making a change in their lifestyle. As their motivations fade, they go back to their old unhealthy habits. Similarly, a kind of rebound effect can be seen in budgeting where individuals abandon their budget altogether and revert to old spending habits. 

That’s why your budget must be realistic, as it gives you the motivation to stick to it. It allows you to not make too many cuts from expenses you need or want and gives you the freedom to live your life while still keeping your financial goals in check. But the 50/30/20 rule is a general guideline. Depending on your situation, you can adjust these percentages to better fit your personal financial situation and goals. Consulting with a certified financial advisor can also provide personalized advice tailored to your unique circumstances.


How do you know if an item is a want or a need?

Needs are essential expenses. If it’s important for your survival, you can categorise the expense as a need. For example – groceries, rent, mortgage, and work travel expenses are considered needs. On the other hand, expenses that make your standard of living better are wants. Stuff you don’t need to survive enhances your life by making it more fun or comfortable. Examples of wants are streaming subscriptions, new clothes, gym memberships, and many more. 

Why is budgeting important?

Budgeting is the foundation of effective personal finance management. A budget allows you to stay within your means. It helps you categorise your expenses into wants and needs and helps you identify areas where you can make cutbacks and save more.  A budget also ensures that your essential expenses can be met comfortably, while also allowing you to allocate income towards achieving your financial goals and allowing you to spend on things that make your life a bit more comfortable and fun. 

What are some examples of needs?

Some examples of ‘needs’ are – Rent and mortgage EMIs, electricity/water/gas/mobile bills, groceries that are necessary for survival, medical expenses, debt payments, and work travel expenses.

What are some examples of wants?

Some examples of wants include – Unnecessary groceries like ice cream or snacks, food ordering, going out to movies, concerts, and restaurants, expensive clothing, streaming service subscriptions, vacations, and money spent on hobbies.

What is the difference between budgeting for a need and a want?

The main difference between budgeting for a need and a want is that needs are prioritised, and money should only be spent on wants when all necessities of life are met.