One of the most important skills in managing your finances is the ability to differentiate between wants and needs. This distinction plays a critical role in budgeting, saving, and avoiding unnecessary debt. By understanding what truly counts as a "need" and what falls under the category of "want," you can make more informed financial decisions that align with your goals. Here’s a guide to help you sort it all out.
Needs are the essentials, and are the things you require to live and maintain a basic standard of living. Without meeting these needs, your well-being and daily functioning would be compromised. Common examples include:
Needs are the foundation of your budget. If these are not met, your ability to thrive can be affected, so they should always be your top priority.
Wants, on the other hand, are the extras, or the items or experiences that enhance your life but aren’t essential for your survival. While they bring joy and comfort, you can live without them. Examples include:
Wants can improve your quality of life and are great to indulge in when you can afford them, but they should take a backseat to your needs when money is tight. However, it is important to satisfy your wants in moderation, otherwise your mental health can be compromised.
It’s not always clear whether something is a want or a need, especially in today’s world where convenience and instant gratification are so accessible. Here are some questions to ask yourself when faced with a purchase decision:
Once you’ve distinguished between your needs and wants, the next step is finding balance in how you manage both. Here are some tips to guide you:
When creating or revisiting your budget, always prioritize your needs. Calculate your essential living expenses first (housing, utilities, food, etc.) to ensure that these critical areas are covered. If you can’t meet these obligations comfortably, reassess your discretionary spending on wants. The 50/30/20 rule is a great budgeting method to help you balance your spending. Allocate 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment. See our past articles for more information on this topic.
Learning to delay gratification can help you avoid impulse spending on wants. If you’re tempted to buy something non-essential, try waiting 24-48 hours before making a decision. Often, the initial urge to spend fades, and you realize you didn’t really need the item after all.
Instead of cutting out all wants entirely, set aside a specific portion of your income for fun spending. This allows you to enjoy your favorite activities or treats without derailing your financial goals. Having a set budget for wants will help you control your spending and avoid guilt when you decide to indulge. If you receive a benefit, such as a bonus or tax refund, consider splitting it between savings and a “wants” fund, allowing you to satisfy your indulgences while building up money for the future.
Not all wants are the same. Some wants may bring you immediate satisfaction, while others may have long-term value, such as investing in a hobby or upgrading a tool you use frequently such as a lawnmower. Consider how the purchase will affect your life long-term. Will it continue to bring value or happiness months from now, or is it a fleeting desire?
Advertisers are great at blurring the line between wants and needs, often making us feel like luxury products or services are necessities. Be mindful of how much time you spend scrolling through social media, browsing online stores, or watching commercials. The less exposure you have to advertising, the less likely you are to be tempted to make impulse buys.
It can be easy to focus on what we don’t have, especially when comparing ourselves to others. But practicing gratitude for the essentials you already possess, for example a roof over your head, good health, and food on the table, can shift your perspective and make you feel more content with less. Less is sometimes more!
Understanding the difference between wants and needs is a crucial step toward financial freedom. By making a conscious effort to prioritize your needs, budget responsibly, and delay gratification on wants, you’ll find that managing your money becomes much easier. You’ll not only build a stronger financial foundation but also create space for the things that truly matter in life.
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