Understanding the difference between “needs” and “wants” is one of the most important elements of financial literacy and budgeting. In order to help you understand the difference between the two, below you will find a Smart and Simple way to think about needs and wants before making a purchase.
There has been a lot of advice published about this subject, but the majority of it is pretty samey. What it tends to boil down to is some sort of a fixed split of your money – most commonly the 50/30/20 rule (representing needs/wants/savings) or some version of it.
That’s not necessarily bad advice when it comes to your finances, but it doesn’t always fit neatly into complex individual circumstances. Sometimes what you have to spend in each area goes up or down according to personal circumstances.
The list below helps to clarify what you truly need vs what you merely want, and also helps to prioritize those needs. The information can be used by kids and teenagers as well in order to get them on the patch to financial stability. It starts with the things you absolutely have to pay for (“absolute needs”), then moves on to needs that there is a little more wiggle room on (“flexible needs”). the list, as well as the basics of financial literacy, then helps you to recognize and prioritize your wants.
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.
“Absolute needs” are the things you absolutely can’t go without. Recognizing this category of items and spending is critical to increasing your financial literacy. These items are where you start with your budget, because your life would literally come to a stop and be in chaos without these Absolute Needs.
Shelter is first and foremost. It’s key to everything else you need to survive – sleep, cleaning, cooking, storing your stuff and a safe haven. For most people, that means rent or a mortgage. Not only that, but it’s usually much harder to get financial assistance to pay for housing than it is with smaller essentials like food and clothing, so shelter usually has to be item #1 on the budget list. This also needs to be financial priority #1 for low income families.
Utilities should be next, if they aren’t included with the rent. You need water for drinking and sanitation, and you need electricity for cooking and heating/cooling. You also probably need a phone line for work purposes and to be available in emergencies, if nothing else.
Then you need food. While you need food every day to live, it’s not as high up the budget list because most areas have pretty substantial assistance options if you get into a real emergency – free food pantries, soup kitchens, EBT programs and so on. But the monthly budget should definitely include something for proper nutrition.
Nutrition is too complex a topic to go into detail about here, but your budget should make sure these six big dietary needs are covered in some form – protein, complex carbs, healthy fat, vitamins, minerals and dietary fiber.
When budgeting for food, don’t forget about your necessary toiletries: soap, paper towels, garbage bags and things of that nature. And if you have a child, your child care expenses are essential as well.
Clothing is another absolute need, though not one you’ll necessarily have to spend on every month. It’s also another area where substantial help is usually available from charity organizations including free clothing closets, and in a pinch you can grab something really cheap that works from a thrift store. Show your kids how to shop for gently used goods, then take the money saved and invest it.
Transportation might not require budgeting for everyone, but it’s something that you have to consider. How are you going to get to work, appointments, the grocery store, and so on? A car or public transit? If you need a vehicle, you have to consider the ongoing costs associated with it – gas, cleaning, preventive maintenance (such as regular oil changes), insurance, and the possibility of emergency repair expenses.
Any other mandatory payments that could get you in legal trouble if missed should also be included here – student loans, bankruptcy settlements, alimony and so on. While some debts may be reduced per other parts of financial literacy (such as by debt reduction programs), some of these payments due have legal implications.
And if you freelance, or do gig work or some sort of independent contracting to make money, make sure you fully understand your tax situation and are setting enough aside to meet your quarterly or yearly obligations. As taxes are also critical to understanding financial literacy.
Finally, there is medical care. This expense varies greatly from person to person. Young, healthy people might be able to get away without spending on this for quite a long time. On the other hand, someone with a chronic condition might have to make this a higher priority than their rent. But this too, like food, there are often charitable programs to help pay for basic medical or dental care, including community clinics or government resources such as CHIP or Medicaid.
“Flexible needs” are things that are important to you, but could be put off for some amount of time if need be. When it comes to understanding financial literacy and implementing it in your life, these items should be looked over next after you’ve sorted out your absolute needs.
It’s best to try to put something into general savings every month so as to be prepared for emergencies and unexpected expenses. Building savings are important to building a solid financial future, and the savings help with paying future unexpected bills. That said, in the reality we live in, it isn’t always possible to do this each and every month. But this item should definitely be high up the “flexible needs” list for whenever free money is available. Find details on technology for saving and investing.
After that, the next big thing would probably be internet access. This might be something that needs moved to the “absolute” list if you need it for work, paying bills, ride share apps or something else that is vital to your daily life. For those who are in a major cash crisis but need internet, a number of the “free dial-up services” like Juno and NetZero are (surprisingly) still around. Determining the priority is an effective financial literacy skill – as an example, do you need internet for work or education? Or not?
You’ll need to come up with your own dial-up modem, they may limit you to as little as 10 hours per month of free time, and/or may require you to watch ads to use the services, but it is still a possibility in a good deal of the country.
Another entry on this list is health and fitness. Health is a requirement; fitness not so much. While it’s not an absolute necessity, it can head off potential medical expenses at a minimal cost and does wonders for making you feel better about yourself and your life. It can also potentially open certain employment doors for you and help you increase your income and improve the financial success of you and your family.
Cardio can be done for free by running or using a bike, but weight training will probably require such an investment in equipment that a cheap gym membership would be a better idea. Basic gyms like Planet Fitness go as cheap as $10 per month for access to your local gym or $20 per month to access all of their locations. Community health clinics sometimes have free exercise equipment, and larger cities often have lots of free yoga classes about, and some of the private Medicare Advantage and Medigap programs include free gym access.
Retirement savings and investing also falls into this category of Flexible Needs. It’s something you’ll need to do at some point, but the hard truth is that some people go through stretches where they just can’t afford it. Keep it on your list so that it doesn’t slip your mind once the money situation improves, however. While we have information on investing on the financial literacy website, some details include employer-matched 401(k) or 403(b) plans are usually the best bet for people, but if you have to go it alone the best way to start is probably a traditional IRA.
If you have dependents or a spouse, life insurance is a wise idea when it comes to spending. It’s one that can realistically wait if you are still young and healthy, however.
Budgeting to help build credit might also be a good thing to list here. How do you do that? As a good credit score can help you achieve other financial literacy goals, such as lower interest rates on debts, buying a house, and so much more.
Well, aside from paying down debts, you can apply for a secured credit card. Many banks offer these; you basically make a deposit equal to your credit limit (usually around $100-500 for starter cards), which serves to secure the card in case you don’t pay your bills. After a year or so of good payment history, you usually get your deposit back and the card converts to a regular unsecured credit card.
This is where we get into the purchases that are truly optional. This is “just for fun” stuff. You need to know these are “wants” and not “needs”. 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. Remember, any wants you buy, it is less money to save and invest – think about the opportunity costs of your spending.
The theme of the priority wants is things that will cause some distress if you don’t get them soon. Or they 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.
For example, tickets to an upcoming concert or game you don’t want to miss out on. Or spending on some sort of social opportunities that might isolate you from friends if you miss out on them. 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.
Unfortunately, the #1 item on this list for many people will be addictive but unnecessary substances, though – cigarettes, alcohol and sugary treats and drinks for a few of the more mild and socially acceptable examples. This category requires taking a hard look at the possibility of having a physical dependency that you need to break. The reward for doing that is both financial (as you will save money) as well as health.
Some saving for time off should also be a priority – anyone can go crazy if they don’t get a little vacation here and there, even if it’s just a weekend “staycation.”
Long-term wants are the things you would like to have, but aren’t causing you any distress to not have anytime soon. This would be the place for bigger, more expensive goals that are probably well out of reach right now. One good examples would be a nice new car.
This can be achievable as well. But financial literacy is all about setting priorities and following through on them. First will come the basic needs. Then any other wants, including long term ones. it may involve saving and investing to get these items, but long term wants can be had too.
Final thoughts on budgeting and spending needs vs. wants
Budgeting isn’t just about getting your priorities in order, but it is also about not spending more than you really need to on each item. Budgeting, and financial literacy, is knowing the difference between needs, wants, retirement, absolute needs, and the like. For example, not buying the latest iPhone for your communication needs if an older model will do the job. Or understanding how fitness can help you with overall health and even help you make more money through better career prospects. Teach your kids or the youth at an early age the difference between needs and wants, and use this guide to do it.
Also, try to get as detailed as you can with things like groceries as well as other spending. If you just set aside $100 for each shopping trip with no particular plan as to what to buy, you’ll probably end up forgetting things and not spending efficiently. Or if you do not budget, or do not know the basics of wants, vs. needs, you more than likely will struggle with long term financial goals.
By Jon McNamara