One of the most important aspects of creating a budget is separating wants from needs. Before assigning dollar amounts to any categories, it’s important to know which parts of your monthly expenses are an absolute need, and which items would be nice to include, but are not a necessity.
While you’re working towards achieving financial freedom, here are some tips to help you differentiate between wants and needs and how to separate these categories when making your budget.
What is considered a need and a want?
Some needs to consider are food, rent or mortgage, utilities, and other expenses. Transportation costs, insurance coverage, and any clothing and tools you need for work are included in this part of your budget.
A want includes expenses that you can comfortably live without and is not essential for survival. This varies from person to person, but some examples are eating out, going to the movies, or the newest cell phone.
Where do your financial goals fit among wants vs. needs? Whether you’re saving for emergencies, paying off debt, or building retirement savings, all financial goals can be considered needs. Achieving your money milestones is essential to staying financially fit and take precedence over your wants on your financial freedom journey.
How to List Your Wants vs. Needs
- Start with your needs first and be as specific as possible.
- When you’ve completed your list of needs, compile your remaining expenses in your wants category.
- Along the way, ask yourself the following questions: Do you really need this item to live and function? Are there options to save money on this need? How would your life be different if this item wasn’t part of it?
- Use a free budgeting tool, like Goals and Budgets, to manage your finances. With an overview of all your accounts in one place and automatic budgeting suggestions, you’ll stay focused on achieving your money milestones.
Now that you know how to spot the difference between wants and needs, creating a budget is easier and faster. Assign dollar amounts to your needs, set aside money for your savings and your other financial goals, and then use the rest as your spending money for some of your wants.
Making Adjustments to Your Wants vs. Needs List
See if there’s anything that needs to be removed from your list. Will you still need these items a few years from now, or even a few months from now? Are you able to swap your needs for other options?
For example, you’ll always need an emergency fund to get ahead of life’s curveballs. This can include anything from unexpectedly needing a new car battery or getting a tooth repaired. No matter the type of emergencies financial freedom seekers face, they’re prepared with $1,000 stored in the FAIRWINDS Emergency Savings Account. Having a designated savings account can keep your emergency fund out of sight and out of mind.
Do the same for your list of wants. Which of your wants were more important to you in the past than they are today? Trim down your list until you’re left with the wants that add value to your life.
Before purchasing an item, ask yourself if it’s a need or a want. If the item is a want, evaluate its importance and other wants you’ve recently bought before going ahead with the purchase.
Remember: Wants and needs vary from person to person depending on your stage of life. While someone might consider an item a want, it might not be the same for you.
As you’re progressing through your financial freedom journey, follow the recommendations outlined above to learn how to manage these two spending categories with ease while staying in control of your finances.