Budgets typically require you to categorize your expenses by “needs” versus “wants.” While that sounds straightforward enough, it’s not always easy to do. There may be times when you want something so badly (say, a leather jacket or trendy sneakers), it feels like a need. Or, you might dismiss a real need, like taking a week off work, as a want by not fully grasping its importance to your mental health.

Distinguishing between wants and needs, however, is key to your financial well-being — it provides the framework for a budget, allows you to make the most of the money you have, and can help you reach your future goals.

Read on to learn the real difference between needs versus wants, and how to fit both into your budget.

Understanding Needs and Wants

Both wants and needs are psychological factors that drive your spending behavior. Understanding the difference between wants and needs is key for setting up a budget that allows you to meet your basic needs, enjoy your life, and still work towards your future goals.

When it comes to budgeting, needs are usually defined as your essential living expenses, things necessary for your health, and expenses that are required for you to do your job.

Wants, on the other hand, are generally defined as desires for things that go beyond the basic necessities. They can range from small indulgences like a fancy coffee or a new hardcover to luxurious items like a premium car or designer clothes.

To stay on top of your budget and avoid overspending, it’s important to distinguish between needs and wants. However, you may find that these terms are more fluid than they appear at first. While working through your list of expenses, it may seem like items can fit into both categories, making the process somewhat confusing. It can help to dive deeper into what exactly constitutes a need versus a want.

Identifying Your Needs

Strictly defined, a need is something that is necessary to live and function. By this definition, a need includes food, clothing, shelter, and medical care.

In budgeting, however, the category gets broader. There are things that you could technically survive without, but which you need in order to operate as a functional, productive member of society — and to keep that job that’s getting you the paycheck you need to buy food and keep a roof over your head.

For example, if you work in a position that requires you to show up at a specific time and place, transportation is going to be a need, not a want. Since insurance offers financial protection, and in some cases is legally required, you can count insurance as a need.

Needs tend to be recurring expenses that, generally, eat up a large chunk of your paycheck.

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Examples of Needs

Here are some common budget items that typically count as needs:

Rent or mortgage payment
Utilities (e.g., gas, electricity, water)
Food
Transportation
Insurance
Necessary clothing
Healthcare

Recognizing Your Wants

Wants are basically everything that’s not a need. They are expenses that help you live more comfortably and enhance your quality of life.

Wants are 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. Outerwear is definitely essential to protect you from the elements, but if you have two other coats in your closet, that jacket you’re eyeing is probably a want.

Wants are not inherently bad or a poor use of your money. Often, they can help you accomplish important goals like meeting people and socializing with friends, having fun, or staying healthy. Along with needs, they deserve an important place in your budget.

Examples of Wants

Here are some examples of expenses you might classify as wants in your budget:

Entertainment
Dining out
Travel
High-end clothing
Fancy cars
Fitness classes/gym memberships
TV or music streaming accounts
The latest smartphone
Coffeehouse drinks
Hobby-related expenses

Where the Line Between Needs vs Wants Gets Blurry

Sussing out your financial needs versus your wants might sound like a simple task. But this seemingly black-or-white issue can actually get surprisingly gray, depending on your situation.

One source of confusion is that wants and needs won’t be the same for everyone. For example, two people may both need a car for work. However, one might need a luxury car to drive around important clients, while the other just needs a car that will get them to and from work. In the second case, a basic car will suffice.

Another complicating factor is that some expenses contain both wants and needs. Your grocery bill, for example, is a need because you need to eat. However, some items on the list, like expensive cheeses, soda, and ice cream represents wants rather than needs.

The Wants vs Needs Test

To determine if something you want to purchase is a want or a need, consider:
Does this fulfill a basic need? (Basic needs typically include food, water, security, and necessary clothing.)

Is this essential to living a healthy life?
Will not having this in your life cause you any sort of harm?
Will this make you happier or healthier in the long term?
Is it necessary for you to do your job?

Another good way to differentiate wants from needs is to let some time pass before you make a decision about a purchase. Generally, the desire to purchase a need will grow stronger over time, while the desire for a want will wane with passing time.

Another distinguishing characterisitc betweens needs and wants is that needs rarely change over time, whereas wants are often trends that will fade. If you’re trying to rein in unnecessary spending, it pays to think consider whether a purchase will make you happy, healthy, or otherwise fulfilled for a long time, or if it’s just something you want because it’s currently popular.

While there’s something to be said for retail therapy, you don’t want to fall into the trap of buying things because they make you feel better in the moment (especially if it means running up credit card debt). These purchases tend to get forgotten relatively quickly, sometimes in a just a few days or weeks. If on the other hand, a purchase will likely service it’s purpose for at least two years, you can feel better about spending the money.

Practical Strategies for Budgeting

To account for both needs and wants in your budget, you might consider the 50/30/20 framework.

This approach divides your net income into three basic categories, spending 50% on needs, 30% on wants, and 20% on savings and paying off debt (beyond the minimum payment). Just keep in mind that those percentages may not be realistic for everyone. If you live in an area with steep housing costs, for example, you may need to spend more than 50% on needs and take some away from the wants and/or savings categories.

To see how your spending currently measures up, go through your monthly expenses, create a master list of things you spend your money on, and then create a list of needs and wants. You’ll want to place insurance and a basic phone plan under needs, but a subscription to a streaming service or a premium cable package will more than likely fall under wants.

The next step is to tally up what you’re spending in each category and see how the totals compare to your monthly take-home income. If you find your current spending is out of line with your chosen breakdown (such as 50/30/20), you’ll want to make some adjustments.

You might start by moving things around. Some of the items you’ve indicated as needs may actually be wants, or vice versa.

Next, you’ll want to look for places to cut back. While you may think your needs costs are fixed, it may be possible to shop around for a better price on certain monthly essentials, like insurance or a phone plan. Or, maybe you don’t need to drive to work but could spend less by taking public transporation or carpooling with a coworker.

Typically, however, it’s easiest to find places to cut back in the wants category. For example, you might decide to get take-out less often and cook more nights a week, brown bag your lunch, get rid of streaming services you rarely watch, and/or jog outside instead of going to a gym.

Any savings you uncover can then go towards your savings and debt repayment category. This can help you to get out from under high-interest debt faster (which will free up even more money for saving) and allow you to work towards goals like building an emergency fund, going on a vacation, buying a home, and funding your retirement.

Reviewing and Adjusting Your Budget

Once you’ve rejiggered your spending and created a basic 50/30/20 (or similar) budget, it’s important to track your spending to make sure you’re sticking to your budget and spending an appropriate amount on needs versus wants.

One easy way to do this is to put a budgeting app on your phone (many are free for the basic service). Budgeting apps typically connect with your financial accounts (including bank accounts and credit cards), track spending, and categorize expenses so you can see exactly where your money is going each month.

Once you start tracking your spending, you may find that your original budget breakdown isn’t realistic and you’ll need to make some adjustments to your budget. For example, maybe it isn’t feasible to save 20% of your take-home pay right now. You might start with 5% or 10% and increase the percentage as your income grows.

It’s also a good idea to check in on your budget every six to 12 months. Your needs, wants, and goals will change over time. The key to creating a sustainable budget is to treat it as a living document and periodically evaluate it and adjust it as necessary to ensure that it meets your current financial goals.

The Takeaway

Some things you need — a place to live, electricity in your home, gas in your car to get to work — and some things you just want, like tickets to a concert or a membership to a gym. The key to smart budgeting is making room for both needs and wants, as well as saving. A balanced budget can help you live well right now, while also getting you closer to your short- and long-term financial goals.

This article originally appeared on SoFi.comand was syndicated by MediaFeed.org.

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