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Needs vs. Wants: How to Budget for Both
Needs vs. Wants: How to Budget for Both
Determining needs
Financial needs are expenditures that are essential for you to be able to live and work. They’re the recurring expenses that are likely to eat up a large chunk of your paycheck — think mortgage payment, rent or car insurance. Some recurring expenses cost roughly the same amount each month. For instance, if your car insurance costs $1,800 annually, you can predict a monthly expense around $150. This is known as a fixed expense in a budget. Here’s a short list of some common expenses that fall under needs: Housing. Transportation. Insurance. Gas and electricity. Food.Meet MoneyNerd, your weekly news decoder
So much news. So little time. NerdWallet's new weekly newsletter makes sense of the headlines that affect your wallet.So much news. So little time. NerdWallet's new weekly newsletter makes sense of the headlines that affect your wallet.
So much news. So little time. NerdWallet's new weekly newsletter makes sense of the headlines that affect your wallet.
Identifying wants
Wants are expenses that help you live more comfortably. They’re the things you buy for fun or leisure. You could live without them, but you enjoy your life more when you have them. For instance, food is a need, but daily lunches out are likely more of a want. The cost of wants can be difficult to predict because they often fall into the category of variable expenses in a budget, meaning they fluctuate over time. Say you go shopping and spend $45 on a new shirt this week but the week before you didn’t spend any money on clothes. Now rewind to last month when you dropped $150 on a new pair of shoes. Variable expenses may run up and down like this, and will need to be accounted for in a budget. Wants typically include things such as: Travel. Entertainment. Designer clothing. Gym memberships. Coffeehouse drinks. Wants and needs won’t be the same for everyone. You may need a car to get to and from work each day, for example, but the type of car you need can vary. If your job requires driving around high-powered clients, for example, a luxury car may be a need. If you're simply shuttling yourself to and from the office, it's probably a want and a more affordable car will suffice. The same is true for smaller-ticket items, like that new coat you're eyeing. Outerwear is definitely essential to protect you from the elements, but if you have three other coats in your closet, that jacket is probably a want. » MORE: 8 steps for tracking your monthly expenses » MORE:Budgeting for both needs and wants
So how do you start accounting for wants and needs in your budget?1. List
Begin by writing a list of all the things you buy. That means everything from toilet paper to life insurance. Then, group purchases into broad categories like toiletries, cable, phone and insurance.2. Divide
Divide the categories into two buckets: wants and needs. We would place insurance and a basic phone plan under needs, but a Netflix subscription and deluxe cable package will more than likely fall under wants.3. Tally
Tally the totals and align your priorities. At NerdWallet, we recommend the 50/30/20 budget. If you distribute your monthly income in this fashion, you would spend 50% on needs, 30% on wants and 20% on savings and paying off debt. Plug your monthly take-home income into this budget calculator to determine how much you have available for each category.Calculator
The 50/30/20 budget Find out how this budgeting approach applies to your money. Monthly after-tax income Monthly after-tax income Monthly after-tax incomeInclude your take-home pay and add back in any payroll deductions for health insurance, 401(k) contributions and other automatic savings.
Your 50/30/20 numbers: Necessities Wants Savings and debt repayment Do you know your “want” categories? Become a NerdWallet member to track your monthly spending trends, including how much you're allocating to needs and wants. Get started If your current spending is disproportionate based on the list you made, there’s good news: You can make adjustments. Here’s a simple way to start: Move things around. Take a close look at your categories. Some of the items you’ve indicated as needs may actually be wants, or vice versa. Move things around. Trim spending on needs. The cost of your necessary spending isn’t always fixed. Shop around for a better rate on your phone plan, cable package or even your insurance to save money on your needs. Trim spending on needs. Trim spending on wants. Consider downsizing your wants if they’re taking over your budget. Limit how many days you dine out, for example, or opt for more affordable lodging the next time you travel. Trim spending on wants. » Learn more about the 50/30/20 budget » Learn moreMeet MoneyNerd, your weekly news decoder
So much news. So little time. NerdWallet's new weekly newsletter makes sense of the headlines that affect your wallet.So much news. So little time. NerdWallet's new weekly newsletter makes sense of the headlines that affect your wallet.
So much news. So little time. NerdWallet's new weekly newsletter makes sense of the headlines that affect your wallet.
Explore more on About the author Mulka Lisa Mulka is a freelance writer specializing in personal finance content. With more than 15 years of writing experience, Lisa most recently authored a book on personal financial literacy and served as lead writer on the FDIC’s Money Smart for Young People program. She holds a bachelor’s in creative writing, and master’s degrees in written communication and in educational technology. Lisa lives with her husband and two children in Michigan, where she spends her free time teaching the next generation of writers at Johns Hopkins University Center for Talented Youth. What is a budget? A simple guide to getting started By Lauren Schwahn, Amanda Barroso How to Budget Money in 5 Steps By Amanda Barroso, Lauren Schwahn Sinking Funds: The Secret to Stress-Free Expenses By Amanda Barroso What Is My Net Income? By Lisa Mulka