Creating a monthly budget is one of the first major steps toward achieving your financial goals. The process sounds very simple:
- write down your income
- write down your expenses
- make sure you are not spending more than you earn
Unfortunately, when you sit down and actually go through this process, it can become a bit more challenging. One of the most important steps in this process is determining which of your expenses are “needs” and which are “wants.”
Categorizing your expenses can be difficult because what you might think is a “need” might be a “want” to someone else. Plus, it is very easy to accidentally categorize a want as a need, especially if you have become so accustomed to something that you can’t picture your life without it.
Let’s break down your needs and your wants so you can maximize your savings and achieve your financial goals.
What Are Needs and Wants Expenses?
When you create your monthly budget and you start listing down all of your expenses, it is very helpful to categorize each expense as a need or a want.
By doing this, you can understand what expenses are absolutely necessary for your survival as a human being. Note that you could take this to the extreme and say you need very little to survive. But what we’re talking about here are the things you need to survive in today’s society.
On the flip side, what are those things that are great to have but in the end, you could do without? These are your wants expenses.
Examples of Needs
Your needs expenses are typically your basic living expenses. Things you need to spend on to eat, have a place to live, make sure you are in good health, etc. Most of the time, these expenses tend to be relatively fixed from month to month. Some examples:
- Rent or mortgage payment
- Utility bills
- Phone bill
- Internet bill
- Grocery spending
- Car payments
- Car insurance
- Gas for transportation
- Gym membership
Notice I’m including some things here that you might question at first. Phone bill, gym membership? While technically you don’t NEED these to survive, I would argue they are crucial for making your life manageable in today’s society.
Not having a phone will make it extremely difficult to function in today’s society. And while you can exercise and stay healthy without a gym membership, it provides a lot of extra benefits by making the process simpler.
Keep in mind, if you decide to sign up for the $300 gym instead of the $30 option, then that expense has become a want and not a need.
Examples of Wants
On the other hand, wants are things you could survive without. However, these are often the things that make our lives more enjoyable from day to day. That is why it is important to figure out which of your wants are the most important to you. Which gives you the most value. Some examples:
- Eating out
- Travel
- Streaming subscriptions
- New clothing
Wants That Are Disguised as Needs
Categorizing your expenses as a need or a want can sometimes be more challenging than what I have described above. There are a few different reasons for this.
Combined Expenses
Some of your expenses likely contain both needs and wants. When you go to the grocery store, you could just buy the basics you need to survive (protein, whole grains, fruits, and veggies). But most of us walk out with more than just that. We buy snacks and other things that we don’t necessarily need but that we enjoy from time to time.
Which Options Your Choose
Sometimes the thing we are spending money on is a need, but the option we choose to buy makes it a want. For example, I already mentioned above that I believe a phone is a need. We all need to be able to communicate with our family, our work, etc. every day to survive in today’s society.
But which phone did you buy? Likely, all of that can be accomplished with a phone that is much cheaper than the ones we end up buying. And that’s ok. Just remember that is now a want expense.
Is Saving a Need or a Want?
When you are creating your budget, it is very easy to plan your spending on everything else first before you consider your savings and investing. And while it doesn’t always seem that important now (or that fun), prioritizing saving and investing is necessary if you want to achieve your financing goals.
This spending may feel like a want since you do not need it immediately to survive today. But if you take a longer-term perspective, saving is a need if you want to be able to survive in retirement.
That is why I always suggest that when you are creating your budget, the first thing you do is design a savings plan to meet your retirement goals and set up how much you are going to save each month. I also believe paying down existing debt falls in this same category as a need.
You can always go back and readjust your savings goal after you have finished your budget. But starting with your savings might make you rethink some of your other want expenses if they are preventing you from achieving your goals.
Adjusting Your Spending
If in the process of putting together your budget, you find that you need to cut your spending to increase your saving, look at your wants first. By categorizing your expenses into needs and wants, you can more quickly identify places where you can cut back spending when you need to.
However, this doesn’t mean that you should never look at your need’s expenses when searching for ways to reduce your spending. For example, is there a cheaper option for rent or a gym membership that you can switch to?
Your needs expenses will often make up the largest share of your overall budget. By rethinking how your needs expenses look, you can make the biggest impact on your overall spending.
Final Thoughts
The main goal of creating a budget is to get clarity on how you are spending your money. From there, a budget allows you to prioritize spending on what is most important to you while ensuring that you are on track to reach your financial goals. Breaking down your expenses into needs and wants is the best way to do this.