Understanding needs and wants when spending money

Many families struggle to stretch a paycheck far enough to cover the basics. When money is tight, deciding what to pay for first becomes stressful and confusing. The most useful financial skill for people with limited income is learning the difference between what you truly need to survive and what is only a want. This distinction is the foundation of budgeting, building savings, and getting control over money.

There has been a lot of advice published about this subject. Most websites talk about simple formulas such as the 50-30-20 rule – 50% goes to needs, 30% goes to wants, and 20% goes to savings. Those formulas assume you have steady income and room in the budget for savings and extras. Many low-income households do not. 

Bills change every month, emergencies happen, and income may go up and down. This guide focuses on real-world circumstances and helps you sort your spending into categories that match how life actually works when money is tight. Sometimes what you have to spend in each area goes up or down according to personal circumstances.

The idea is simple. Needs keep you safe and stable. Wants make life enjoyable but can be delayed. When you learn to separate the two, every financial decision becomes clearer, and you reduce stress, avoid missed payments, and protect yourself from unnecessary debt.

Why needs and wants get confused when money it tight

People facing financial hardship often or that live on a low-income live with constant stress. This stress affects decision-making, a concept sometimes called “scarcity mindset or pressure.” The mind becomes focused on solving immediate problems, and impulse spending can become a way to feel temporary relief.

This makes it harder to separate needs from wants. A fast-food meal can feel like a need after a long workday. A child asking for something small may trigger guilt that leads to unnecessary purchases. A new phone upgrade can feel urgent even when an older model works correctly.

Understanding the difference between needs and wants

Needs are expenses that must be paid to maintain stability. The money you spend on these bills in effect protect your housing, health, employment, safety, and family obligations. Without these items, daily life becomes unsafe or unmanageable. 

Wants are everything else. They are items or experiences that you may enjoy, but that you can delay or skip without putting your home, job, or health at risk. Many people, including teenagers and young adults, often mistake wants for needs. Learning the difference early prevents years of financial trouble.

This article breaks needs into two groups. Absolute needs are the highest priority and must be covered first. Flexible needs are still important but can be adjusted, delayed, or reduced when income is low. After needs are handled, you can consider wants. The list below, as well as the basics of financial literacy, then helps you to recognize and prioritize your wants.

This framework works for adults, seniors, young adults, and families. It is also a practical tool for teaching children about money. It’s a little more complicated than a simple 50/30/20 split, but once you work through it you’ll have a much more personalized plan of action that works better for your individual circumstances.

How to help decide whether something is a Need or a Want

One simple question helps low-income households decide: “If I delay this purchase, will my housing, food, utilities, job, health, or legal obligations be harmed?” If the answer is yes, it is a need. If the answer is no, it is a want.

Another helpful method is the five-day rule. If something is not required for survival or work, wait five days before buying it. Most wants fade after the waiting period, but needs remain clearly important.

Families can also teach their children this skill. Explaining why some purchases must wait reduces guilt and helps children understand the household’s priorities. When parents feel pressure to provide beyond their means, this method helps reframe what is truly necessary.

Absolute needs

Absolute needs can be thought of as the things you cannot safely live without. They are the first expenses you pay each month. These daily or monthly bills are where you start with your budget, because your life would most likely would literally come to a stop and be in chaos without these absolute needs.

Housing (shelter) is always at the top. Rent or a mortgage keeps you sheltered, safe from the weather, and able to sleep, cook, store food, and clean. Housing is also the hardest household bill to get assistance for if you fall behind. Most cities offer far more help for food, clothing, or simple emergencies than they do for rent. This means the housing bill must be protected above all others.

Utilities needed for basic living come next. Water is required for drinking and sanitation. Electricity is required for refrigeration, heating or cooling, lighting, and cooking. A working phone is necessary for employment, emergency calls, and staying reachable by schools, doctors, and government offices.

Food is also a core need, though help is widely available. Programs such as the Supplemental Nutrition Assistance Program, free food distribution centers in every community, mobile food distributions, WIC, and school meal programs can reduce the cost of groceries when money is tight. Even with those supports, it is important to include basic nutrition in your budget. Every person needs protein, complex carbohydrates, healthy fats, vitamins, minerals, and fiber.

• At the same time as planning for food, households should also plan for basic toiletries such as soap, toilet paper, garbage bags, and cleaning items. For parents, child-care expenses required for work fall into this same category of essentials.

Clothing is another absolute need, though the cost does not occur every month. Charities operate free clothing closets, churches distribute coats and winter wear, and thrift stores offer extremely low-cost options. Having at least enough clean, functional clothing to work, attend school, and stay warm is essential for stability.

• Low-income families should rely on thrift stores, church clothing closets, and seasonal giveaways to reduce this cost. Clothing purchases should be simple, functional, and based on actual necessity.

Transportation is also an absolute need for many households. Getting to work, school, medical appointments, and the grocery store is not optional. Some people will need a car and must budget for gas, insurance, and repairs. Others can rely on public transit, ride-share services, bicycles, or walking. The key is to plan for the method you depend on rather than hoping the cost does not appear unexpectedly.

Legal obligations are also absolute needs. Court-ordered payments, certain taxes for self-employed workers, some student loan payments, and other required bills must be managed to avoid penalties. Many borrowers now qualify for income-driven repayment plans with payments as low as zero dollars, but the household must still apply through https://studentaid.gov to activate the program.

Medical care is also a need. The cost will vary depending on your health and insurance status. People with chronic conditions may have to budget more each month for medications or treatment. Low-income households should check programs such as Medicaid at https://www.medicaid.gov and the Children’s Health Insurance Program at https://www.medicaid.gov/chip.

• There are other ways for a lower income family to get help with their need for medical care. Other options include community health clinics also offer free or low-cost visits, dental cleanings, and prescription assistance.

If you work as an independent contractor, do gig work, or freelance, you must also treat taxes as an absolute need. Setting aside money for quarterly or annual tax payments prevents debt and penalties.

Flexible needs

Flexible needs are important but can sometimes be reduced, delayed, or modified during financial emergencies. These expenses help you maintain long-term stability but do not usually threaten your safety if you temporarily adjust them.

Savings is the most important flexible need. Even five or ten dollars set aside per month creates a small safety net that prevents crises from turning into disasters. Low-income families often feel they cannot save, but small amounts still matter. Unexpected expenses, such as a car repair or utility bill, become manageable when savings exist, even in modest amounts. There are tools that can help you save money to more effectively, with details here about technology for saving and investing.

Internet access varies between “absolute” and “flexible” need for many families. It becomes an absolute need if you rely on it for work, education, job searches, medical portals, or bill paying. However it can be flexible if not needed for a job or education – as there are places to get online for free such as a library, coffee shop or other locations.

• Whether it is absolute or flexible for you, low-income internet programs are available through providers and nonprofits, and details change often. Households should research current offers directly through their internet provider’s website.

Health and fitness also fall into this category. Regular exercise helps prevent long-term medical problems and reduces stress. Walking, running, and body-weight exercises are free. Some community centers provide no-cost fitness classes. Many low-cost gym chains offer low monthly memberships and occasionally waive enrollment fees.

Retirement planning is also a flexible need. People with very low income may not be able to contribute consistently, but they should still understand their options. Employer-matched retirement plans such as 401(k) or 403(b) programs are beneficial when available. Individuals without employer plans can consider a traditional IRA through a bank or investment company. These decisions can wait until income becomes steady enough to handle regular contributions. We also have information on investing on the financial literacy website which can help you navigate this process.

Credit building is another flexible need. A strong credit score can reduce interest rates on loans and save large amounts of money over time. People with limited credit history or low scores can begin by paying bills on time and by using a secured credit card from a bank or credit union. The card is funded by a small deposit and converts to a regular card after a period of responsible use.

Life insurance may also belong on this list. Households with dependents should include it eventually, but young and healthy adults can delay it during severe financial hardship.

Priority wants

Many families mix up needs and wants because of emotional pressure. Children may ask for items to keep up with trends. Adults may spend to relieve stress. When a paycheck is stretched thin, these purchases can cause late fees, overdrafts, or utility shutoffs that cost far more in the long run

Priority wants bring enjoyment or support emotional well-being, but they are not essential to survival. They can be purchased only after needs are fully paid and some savings goals are met. This category often includes items that feel urgent but are not truly required. Remember, any wants you buy, it is less money to save and invest – think about the opportunity costs of your spending.

• As part of financial literacy, you should cover your needs first, then pay for yourself/save for the future, and only then, with any discretionary income, pursue these wants. Teach your kids and teenagers that these are just wants. 

Social activities, hobbies, entertainment, and upgraded versions of basic items fall here. Examples include concert tickets, streaming services, new electronics, new clothing that is not required for work, restaurant meals, and specialty groceries. Or getting that new iPhone or TV. Or buying a new, fancy outfit. Or spending money on fancy food, restaurant meals, unnecessary pet supplies and countless other items.

Addictive or unnecessary products such as alcohol, cigarettes, and sugary drinks also fall into this group. For many households, these items consume a significant portion of income without adding value. Reducing or eliminating them frees money that can be redirected toward needs or savings.

Short breaks or time off can also be considered a priority want. Taking a weekend at home or visiting a local park is inexpensive and can prevent burnout.

Many of these expenses are purchases that you think will make you happy, even if it is for a short period of time. As too many people just buy stuff to “keep up with the Joneses”. Anything that is not a need can really fall into the wants category. Find out, and learn more, about the concept of Keeping up with the Joneses.

Long-term wants to plan and spend for

Long-term wants are bigger goals that require planning, saving, or long-term progress. They are not urgent and should be pursued only after needs, modest savings, and a basic level of financial stability are established.

Examples include upgrading a vehicle, taking a major vacation, remodeling a home, or buying luxury items. These goals are reasonable when approached with patience, savings, and planning, but they should never come before basic needs.

Final thoughts on needs, wants, and budgeting your monthly spending

Budgeting for low-income households is not about strict rules. It is about protecting the essentials, avoiding unnecessary debt, and making thoughtful decisions in the face of financial stress. Understanding needs and wants creates clarity. It reduces panic during emergencies and helps families make the best possible choices with limited resources.

When housing, utilities, food, transportation, and medical needs are covered, life becomes more stable. When savings begin to grow, even slowly, emergencies become less frightening. When wants are delayed or reduced, more money becomes available for the essentials that protect long-term stability.

This approach allows families to stretch every dollar further while building a more secure future, one careful decision at a time.

By Jon McNamara