Whenever you open up a news site, go shopping or fill the gas in your car, it can remind you of how expensive everything is. Financial experts remind us to tighten our belts and watch our spending as the cost of living rises. If we’re not careful, we may be unable to afford to pay for our necessary expenses, let alone extras.
But, for many folks, drawing the line between what is necessary and what is nice to have is challenging. In other words, it can be challenging to differentiate needs from wants.
Understanding Wants and Needs
In the simplest terms, a need is something you require to live and function, while a want improves the quality of your life and that you enjoy having. Viewing wants and needs by this definition may seem easy to break down. You may think that needs would be the same for everyone and include things like food and shelter, and while it does on a fundamental level, it is more nuanced than this.
Examples of wants and needs often differ among individuals and families. You can attribute the differences to various factors like where you live and access to services.
Let’s look at a few examples.
Everyone would consider transportation a basic need. You need transportation to get to work, get your kids to school and run errands. However, if you live somewhere that has reliable public transport, you probably don’t need a car. Similarly, if where you live everything is within walking distance and it is safe to walk, you can go without a car. However, if there is no public transport or it’s unreliable or unsafe, and you live somewhere where it’s impossible to walk to where you need to go, you will need to buy a car.
So, you’ve established that a car is a need and that you will use it often. You will use it to go to work, take your kids to school and sporting events, and for all your other errands. So, what car do you get? You can get the cheapest car possible because you need to get from A to B, but an affordable car can come with problems.
It may not be safe as it has fewer safety features, and if you’re using it to transport your kids, this is a significant risk. Cheap vehicles may also come with other issues and may need lots of repairs costing you more in the long run. Lastly, if you have a big family, you probably need a big car to accommodate everyone. In this case, a more expensive vehicle is necessary for your life.
On the other hand, a cheaper car might suit your needs if you are a single person who only requires a vehicle to drive a short distance to work and won’t use it much.
If you’re struggling to establish whether something is a want or need, ask yourself if it’s possible to live and function without it. For example, can the need be met less expensively if you need it to live? Then think about what your life would be like without it.
The Best Way to Budget
Once you’ve listed your wants and needs, you can use them to draw up a budget. A standard budgeting tool is to use the 50/30/20 rule. Under this rule, 50% of your income should be spent on needs, 30% on wants, and 20% on savings and paying off debt. While this method works for many, you must choose a split that works for you and your income and expenses. Perhaps, you would be more comfortable with, for example, 45% for needs, 15% for wants, 20% for savings and debt, and 20% for unplanned expenses.
To figure out what split works for you, you must know where you spend your money. Knowing where you spend your money is also the only way to draw up an accurate budget to keep yourself accountable.
If you’re unsure of where exactly your money goes, try keeping a money journal. A money journal will entail recording every dollar you spend. You can do this after every purchase by making a note of it in the Notes app on your phone. Another option is to enter all your spending information every evening on an excel spreadsheet. To keep accurate records, note down the date, what you spent money on, where you spent it and how much you spent.
Keeping a meticulous journal will give you a clear picture of where you spend your money. It will also help you identify small but unnecessary purchases, as many small purchases add up.
With a clear idea of your spending habits, you can create a realistic budget to guide your monthly spending. Try adding as much detail as possible but make sure you can stick to it.
Saving is a Necessity
Saving may not be seen as a need because you don’t need savings immediately. As a result, people rarely save, but this approach can set you up for failure. Saving is, in fact, a need because it is necessary for your future financial well-being.
You should have two types of savings – long-term for retirement and short-term savings that are easy to access.
Long-term savings should include a diverse portfolio of stocks, bonds, and a 401(K). If you work for a company, your employer will probably contribute to your 401(K). Depending on your contract, your employer may match your contributions, and thanks to compound interest, you will have a large amount invested for retirement. You should purchase other investments like stocks and bonds as early as possible to give them time to grow and benefit from compound interest.
Short-term savings should include an emergency fund and money saved to help you make big purchases, like if you need to buy a new car or put down a deposit on a mortgage. You should ideally have enough money in your emergency fund to cover your expenses for three to six months. In addition, an emergency fund will cover you if you lose your job or cannot work.
If you find no room in your budget to save, review your list of wants and needs to look for ways to save. Even if you can’t save 20%, keeping a small amount is better than saving nothing.
Common ways to save include:
Shopping with a Plan
Whether you shop online or at a grocery store, it is easy to put unnecessary items into your cart mindlessly. Instead, decide how often you’d like to go shopping and plan accordingly. For example, you may realize that what works best for you and your family is to do a big shop once a month, bulk buy staples, and then do smaller shops weekly where you buy perishables.
Before shopping, put together a detailed meal plan that includes every meal your family will eat for the week or month. Also, have snacks, cleaning materials, and household items on your list. When buying perishables, it is always best to err on the side of caution. For example, how often have you purchased an entire head of lettuce only to throw it out weeks later untouched?
Planning your meals also forces you to make healthy choices that are good for you and your family, and if you already have a plan of what you’re going to eat, you’re less likely to order a takeaway which is also a huge money saver.
Look for Free Entertainment
While quality time with the family is essential, it doesn’t always have to cost a lot. If you enjoy going out over the weekends, look for cheaper or accessible options. For example, pack a picnic basket instead of going to a restaurant and spend some time in the park.
Free entertainment will save a lot of cash, and your kids will benefit from being outdoors. You can go for a walk or play games like frisbee or soccer, which should keep little ones entertained for hours.
Many museums are free, so look for ones in your area and spend an afternoon taking in the exhibits.
Supplement Your Income
Another way to ensure that you not only meet all your needs but that there is room for your wants is to supplement your income. Having another income stream can allow you to save or pay for extras that don’t fit your budget, like ballet lessons for your daughter or a family holiday.
Nowadays, it’s common for folks to have multiple income streams, and there are several ways you can supplement your income while still working at your day job. Consider the following:
Rent High-Value Items You Don’t Use
There is a growing market to rent rather than buy things you don’t use often. Since many people have less disposable income, they would instead rent an item for a few hours or days if they know they’re unlikely to use it again than buy it. Renting things also solves the other problem of storage. People who live in small apartments don’t have space to store that ski equipment or other bulky items they purchased for a specific purpose that they will probably not use soon.
Popular items to rent include sporting equipment, musical equipment, and tools.
Sell Home-Cooked Meals
There is a significant focus on healthy eating, but as people return to work, there is little time to prepare healthy food. However, if you’re a decent cook, you can sell home-cooked meals to busy professionals willing to pay a premium for healthy home-cooked meals rather than fast food.
A good idea is to offer a subscription service where you deliver meals for the week, once a week. You can provide different options, for example, five, seven, ten, or fourteen meals. This works out to one meal a day for the work week, one for the entire week, including the weekends, or you can offer two meals a day so that they have lunch and dinner. You can give customers a few alternatives or allow them to customize their meal plan considering any dietary requirements.
- Nerdwallet: Needs vs. Wants: How to Budget for Both
- The Balance: What Is the Difference Between Wants and Needs?
- Bettermoneyhabits: Creating a Budget
- Love Exploring: The best free museums in the USA
Mark is the founder of Financial Pilgrimage, a blog dedicated to helping young families pay down debt and live financially free. Mark has a Bachelor’s degree in financial management and a Master’s degree in economics and finance. He is a husband of one and father of two and calls St. Louis, MO, home. He also loves playing in old man baseball leagues, working out, and being anywhere near the water. Mark has been featured in Yahoo! Finance, NerdWallet, and the Plutus Awards Showcase.