Identifying Needs Versus Wants in Your Budget

Budget enthusiasts and frugality experts alike agree in that understanding the difference between a need and a want is key to financial success.

It enables a sequence of priorities in your budget and helps to curb spending on items that are not necessary for survival, or even comfortable living.

That’s why for this week’s Personal Finance Basics post, I’ve chosen to share my own mindset when it comes to classifying wants and needs.

Organizing Your Expenses

I sort my expenses into several neat categories, and doing so helps me compartmentalize my spending in a way that can be “turned on and off.”

It’s like a shut-down sequence on Apollo 13 – if my income was sliced in half tomorrow, I’d know exactly the order I could start turning things off to conserve funds and “make it” for any period of time.

My Needs-Wants Categories

Here’s a simple breakdown of how I classify each expense:

1. Life-and-Death Needs: Includes items without which we cannot maintain life. Examples: Emergency health care, groceries (last time I checked, there was no magic food pill).
2. Basic Needs: Basic life needs that are “enablers” – in other words, they allow us to perform our other daily duties like working, having kids, and basically “existing.” Examples: Housing payments and maintenance, Automobile expenses, required insurance, basic clothing, taxes (unless you prefer a jail cell).
3. Extended Needs: Items that are not absolutely required for basic existence, but make life much easier. Examples: A home phone and/or cell phone, non-essential insurance, saving for future needs, payments on loans.
4. Life Enhancers: Expenses that “make life worth living.” No matter how much money you earn, it’s no fun if you can’t spend at least some of it on things you like and that make life enjoyable. Examples: Entertainment (including cable, movies, dining out ,etc.), travel expenses, non-basic clothing, pets and associated expenses.
5. Free Spending: Everything else we can blow money on, neither required or necessary to enhance our lives. Examples: Impulse buys, things we never use, mindless entertainment like binge drinking, etc.

You can see why this type of setup makes an overview of your monthly spending crystal clear and easy to adjust.

If anything happens, you just start at #5 and work backwards!

Your Turn

Organize each of your expenses into one of these five categories. Remember to be honest – it’s unlikely that any one expense will naturally fit into more than one spot.