Key takeaways

  • It's important to differentiate between needs and wants when assessing monthly expenditures.
  • The 50/30/20 rule is a helpful way to allocate income: 50% for needs, 30% for wants and 20% for savings or debt repayment.
  • Cover essential needs like housing, utilities, groceries and health care before discretionary spending on wants.
  • Adjust allocations based on income or expense changes to stay flexible and aligned with your financial goals.

According to a Bankrate survey, 38 percent of U.S. adults said they would be willing to go into debt for fun purchases in 2024. While having fun is important, it’s also essential to understand the difference between needs and wants.

In casual conversation, you might use the words interchangeably. For example, you might often use phrases like, “I really need a coffee” or “I need those shoes?” in casual conversations.

While you might feel like you need something for gratification, it may not be a true need, by definition — especially where your personal finances are concerned. Understanding the distinction between financial needs and wants can be the difference between short-term satisfaction and smart long-term financial decisions.

Whether you’re setting a budget for the first time or making financial moves for your future, a clear understanding of needs versus wants will help you achieve your goals.

The difference between needs and wants

Distinguishing between wants and needs can be a challenge, especially in a marketing-driven society.

For example, many people were searching for the glasses they “needed” to view the 2024 solar eclipse to avoid retina damage. However, millions have viewed solar eclipses through pinhole projectors or by indirect viewing for thousands of years. So, by definition, solar viewing glasses aren’t a need, even if they can be an affordable and understandable want.

Some people may find it helpful to look at needs and wants through Maslow’s Hierarchy of Needs, a theory that categorizes human needs into five levels, progressing from basic to higher-order needs:

  • Physiological: Essential for survival and includes air, water, food, shelter and sleep.
  • Safety: Physical safety, financial security and protection from harm.
  • Love and belonging: Social connections, intimate relationships and a sense of belonging.
  • Esteem: Recognition, respect and self-worth.
  • Self-actualization: Personal growth, fulfillment and the realization of potential.

When it comes to economic needs vs. wants, there’s something important to remember: Money doesn’t buy love, belonging, esteem or self-actualization.

The simplest approach to distinguishing between wants and needs is to assess whether an expense is necessary for survival and safety or merely enhances your comfort or lifestyle.

When considering financial needs, ask yourself:

  • Will this purchase contribute to my basic survival needs?
  • Does this expense align with my immediate financial priorities?
  • Is this purchase essential for my safety and security?

In personal finance, needs should always take precedence over wants. A list of essential expenses (needs) vs. discretionary spending (wants) can provide clarity and guide your budgeting efforts, even when your budget is tight.

Examples of needs in personal finance

Financial needs are essential expenses required to meet basic living standards. For example, you need to make sure your rent is paid and the power is on.

Needs include:

Prioritizing your needs ensures your fundamental living requirements are met, providing stability and security.

You’ll also want to factor in needs that may not be immediate but are essential to keep a good financial footing. This includes things like keeping a rainy day fund. You might also want to determine if you should do things like pay off your mortgage faster or invest to get on a better financial footing.

These may not be immediate, fixed expenses, but they are necessary for long-term financial success.

Examples of wants in personal finance

On the other hand, financial wants are discretionary expenses that aren’t essential for survival but contribute to our comfort and enjoyment.

For example, you might want to make sure you have money for ice cream each month, and there’s no shame in that if you’re covering your essentials.

Wants include:

  • Dining out
  • Entertainment
  • Leisure activities
  • Non-essential purchases like gadgets or designer clothing
  • Travel

While wants can enhance your quality of life, they should be managed within the constraints of a budget.

Can a need also be a want?

A need can also be a want when it fulfills the necessity for survival and safety as well as the desire for comfort or enjoyment.

For example, housing provides essential shelter, but the type of housing chosen may also cater to your individual preferences for amenities or location. Likewise, while nutritious food is necessary for sustenance, your preferences for dining and cuisine can also influence food choices.

In essence, when an expense serves both a fundamental need and a personal preference, it qualifies as both a need and a want, blurring the distinction between them. Recognizing these dual aspects can help you make balanced decisions with your budget and expense priorities.

How to budget for wants and needs

A popular budgeting method that balances needs and wants is the 50/30/20 rule. Under this framework, you allocate 50% of your income toward needs, 30% toward wants and 20% toward savings or debt repayment. This approach ensures that essential expenses are covered before discretionary spending and savings goals.

Start by listing all your monthly expenses and categorizing them as needs or wants. Fixed expenses like rent or mortgage payments fall under needs, while variable expenses like dining out or shopping fall under wants. Allocate your income accordingly, ensuring that essential needs are prioritized before discretionary wants.

Here’s an example budget for a fixed income of $3,000 based on the 50/30/20 rule:

Needs (50%): $1,500

  • Rent: $800
  • Utilities (electricity, water, gas): $150
  • Groceries: $300
  • Transportation (public transit, gas, maintenance): $200
  • Health insurance: $50

Wants (30%): $900

  • Dining out: $200
  • Entertainment (movies, concerts, streaming services): $100
  • Shopping (clothing, gadgets): $300
  • Travel: $200

Savings/Debt Repayment (20%): $600

  • Emergency fund: $200
  • Retirement savings (401(k), IRA): $200
  • Debt repayment (Credit cards, loans): $200

Total Expenses: $3,000

Of course, you can make adjustments based on your circumstances and priorities. To set your own customized zero-based 50/30/20 budget, you can use Bankrate’s budget sheet.

Practical tips to decide if it’s a need or a want

When faced with gray areas like deciding on major purchases such as a car, it’s essential to approach the decision-making process with clarity.

Ask yourself the following questions:

  • Is it helpful for my daily life?
  • Can I afford it without sacrificing essentials?
  • Are there more economical alternatives that could help me achieve the same outcome?
  • Does it align with my long-term goals?

First, decide if the item serves a fundamental purpose in your life. Reliable transportation for work or family obligations would be a great example. However you may or may not have access to a less expensive alternative like public transportation or a used vehicle.

Next, assess whether paying for a product or service would compromise essential needs like housing, utilities or health care. Make sure the purchase fits comfortably within your budget, and look for alternatives that might cost less.

Finally, consider how the item or experience fits into your overall financial plan. Will it contribute to your well-being and long-term financial stability, or does it represent a desire for convenience or luxury?

By approaching gray areas with practical considerations, you can make decisions that balance wants with essential needs and support your financial health and long-term goals.

How to simplify the prioritization process

Focus on just one thing at a time.

When faced with a laundry list of financial priorities, don’t get bogged down. Instead, identify the one goal that stands out above all. Pick a singular focus to anchor your efforts.

When introducing a new financial habit or routine, anticipate the needed commitment. To make the transition smoother, decide in advance what you’re willing to sacrifice to accommodate it. For example, to save more, consider cutting back on dining out or entertainment expenses. Or, if you already have an established financial routine, pinpoint an aspect to prioritize.

For instance, if you’re budgeting, you might prioritize allocating a larger portion toward debt repayment or emergency savings.

As you make plans, make sure to stick with at least minimum payments on any debts you have. Keep an eye on your credit report, dispute incorrect items as necessary and seek debt relief if you still can’t manage debt.

Next steps

Knowing the difference between needs and wants is fundamental to financial management. While these terms are often used interchangeably in everyday conversation, learning the distinction can lead to smarter financial decisions and long-term stability.

You can incorporate wants and needs into your financial planning by examining your monthly expenditures. Categorize expenses as either needs or wants and apply budgeting methods like the 50/30/20 rule to allocate income effectively. Prioritize needs over wants in your budgeting decisions to ensure your critical expenses are covered first. Regularly review and adjust your budget to stay aligned with your financial goals.

When you have a clear understanding of how needs differ from wants, you’ll be a step closer to financial success.