Budgeting for Needs vs. Wants

Quick Answer

Wants include spending that isn’t necessary for daily life, while needs are essential for your survival. Understanding the difference between the two is important for building a budget and maintaining your financial health.

A couple discussing budget over digital tablet and financial bills.

Your personal budget will include two broad categories of expenses: wants and needs. Understanding necessary expenses versus nice-to-haves in your budget is key to maintaining financial health. Read on to learn how to identify wants and needs and ways you can plan for both and still balance your budget.

How to Determine Your Wants and Needs

It's easy to confuse wants for needs in your budget. You may feel like you need a top-of-the-line brand new car to replace your old one, but a less expensive used model might fit better into your budget. Understanding how to identify each type of expense can help you make more informed decisions about your spending and avoid overspending.

What Is a Want in a Budget?

In a budget, wants are expenses that aren't essential for basic living. They're the things you desire for your lifestyle or for enjoyment.

Wants include things like:

  • Entertainment
  • Dining out
  • Travel
  • Hobbies
  • Luxury items
  • Streaming services
  • Gym memberships

You may have expenses that seem like they can be classified as a want or a need. If you're trying to figure out whether an expense counts as a need, ask yourself a few questions.

  • Is it necessary for survival?
  • Would your health or safety suffer without it?
  • Can you wait to purchase it?
  • Would you use your emergency fund to cover it if you didn't have the cash?
  • What would happen if you didn't have it?

What Is a Need in a Budget?

Needs are expenses that are essential to your survival. They include basic things you need to live, expenses required for doing your job and resources to build and protect your assets.

Needs include things like:

  • Food
  • Shelter
  • Basic clothing
  • Utilities
  • Health care
  • Transportation
  • Insurance
  • Savings
  • Debt repayment

Needs are expenses that you can't skip without jeopardizing your health or well-being. If you're trying to figure out whether something is a need, consider the consequences of not making the purchase. Be careful about confusing wants for needs, however: You need food, but dining out every night is a desire, not an essential expense.

How to Budget for Wants and Needs

If you've ever created a budget, you're familiar with the basic steps of building a budget:

  • List your income
  • List your expenses
  • Subtract your income from your expenses
  • Adjust your expenses if your planned spending is higher than your income

This simple budget doesn't highlight the differences between your wants and needs. When you're building your budget, it can be helpful to take a different approach for each category of spending.

How to Budget for Needs

Since your needs are essential to your survival, they take priority in your budget. It's important to make sure your needs are covered before allocating money to your wants. Otherwise, if you under budget for your needs, you could miss payments on essential spending. Missed payments can lead to serious consequences such as having your utilities disconnected or risking foreclosure.

List your monthly needs and the amount for each. You'll find that some of your needs have a fixed cost each month, like your rent or mortgage payment. Others, like gas or the electricity bill, may vary from month to month. For these variable expenses, you can budget based on an average amount or set a target spending amount. Add up your needs and make sure the amount doesn't exceed your income.

If you're struggling to afford your basic needs, review your budget to find areas where you can reduce spending. For instance, can you carpool to spend less on gas? Can you use less electricity to lower your electric bill? If cutting back isn't an option, you may have to find an additional income source or look for assistance programs that can help you afford these essentials.

How to Budget for Wants

Make a list of your wants, including the amounts. After you've budgeted for your needs, you can start assigning the remaining income to your wants.

You may have to balance your wants with your financial goals. For instance, if you want to build an emergency fund or pay off your credit cards, you may have to cut back on your wants. You don't have to completely sacrifice spending on your wants to meet your goals, however. Striking a balance between the two is healthier and easier to maintain over a longer period of time.

Creating a Budget That Covers Both Wants and Needs

Financial health doesn't mean strictly spending on your needs or splurging on your wants. It's possible to cover your wants (at least some of them) while keeping up with your needs. There are several approaches to budgeting that allow you to balance your wants and needs.

50/30/20 Budget

The 50/30/20 budgeting method allocates 50% of your monthly income toward needs, 30% toward wants and 20% toward savings and debt repayment. Many people find this the easiest method to stick with, as it allows for more flexibility within the main categories.

Envelope Budget

An envelope budget isn't so much a method of budgeting as it is a method for sticking to your spending plan. After you determine what you're spending on each budget category, place that amount of cash in a labeled envelope to guide your spending. This method relies on the use of cash instead of credit cards, so you may miss out on points or cash back from using credit cards, and you'll have to carry actual paper money around with you.

Alternatively, you can use a budgeting app such as Goodbudget that virtually accounts for the amounts in each envelope and removes the need to use only cash.

Reverse Budget

Rather than saving the money you have leftover after paying your monthly bills, the reverse budget prioritizes savings by allocating for it first. Then, you split the remaining budget between your needs and wants.This method is especially helpful if one of your main financial goals is building up your savings.

Zero-Based Budget

Every dollar of your income is assigned to a budget category with zero-based budgeting. In the end, your planned spending should exactly equal your income once all your debt repayments, budgeted wants and needs, and deposits into savings are accounted for.

The Bottom Line

While your wants can easily feel like needs, it's important to be able to differentiate between the two so you can make the best spending choices. It's OK to spend on wants, as long as your budget allows. However, there may be times that you need to reduce spending on your wants to focus on other financial goals.

There are several budgeting methods you can use to balance your wants and needs. You may enjoy the convenience of a budgeting app, since you can access it from anywhere to plan and manage your spending, or an accountability app that helps keep you on track with your spending.