Understanding the Distinction Between Desires and Necessities in Budget Planning
Budgeting is a critical financial skill that everyone should master. One fundamental aspect of this is understanding the difference between wants and needs when planning your budget. Let’s delve into this topic and see how striking the right balance can improve your financial health.
Learning The Basics of Financial Planning
Financial literacy is a journey that begins from our early years. Some of us might recall our parents explaining why we couldn’t have that enticing candy bar at the supermarket. That was probably our first lesson in distinguishing wants from needs.
The ability to differentiate between wants and needs is a cornerstone of successful budgeting.
Budgeting Habits: A Canadian Perspective
Research shows that less than half of Canadians consistently maintain a budget. This statistic suggests a general lack of awareness about spending habits, particularly the balance between wants and needs. However, this trend is not irreversible, and a bit of financial consciousness can go a long way in regaining control over one’s spending.
What are Needs?
Needs are the essentials, the things we can’t live without. These are the expenses in your budget that are absolutely vital for your survival. Common needs include:
- Food;
- Clothing;
- Shelter;
- Utilities (heat and light);
- Transportation (to work, grocery store, etc.);
- Medical / dental / prescription costs;
- Insurance;
- Retirement and emergency savings.
What are Wants?
Wants are non-essential items, services, or experiences that we desire. They might bring us happiness, but they aren’t necessary for survival or success. Here are some examples of common wants:
- Televisions;
- Tablets;
- Jewelry;
- Art and home decor;
- Travel;
- Entertainment (concerts, movies);
- Upgrades for novelty (new computer, blue jeans, etc.);
- Non-essential home upgrades;
- Non-essential savings (vacation, luxury purchases).
Identifying Grey Areas
Budgeting becomes tricky when purchases don’t neatly fit into either the ‘needs’ or ‘wants’ category. Here are a few examples:
Groceries
While food is a basic need, not all grocery purchases are essential. Buying brand-name items, succumbing to impulse purchases, or dining out frequently can inflate your food budget.
Clothing
Clothing is a need, but your spending can easily drift into the ‘wants’ category if you’re buying expensive brand-name items or spending excessively on fashionable clothes.
Utilities
Heating your home is a need, but maintaining a higher-than-necessary temperature can be considered a want. A slight reduction in temperature can lead to significant savings.
The Concept of ‘Weeds’
‘Weeds’ are purchases that don’t feel as critical as needs, but more urgent than wants. It takes a bit of introspection to identify what these are for you. Here are some possibilities:
Automobile: While not essential for life, a car might be necessary depending on your location and access to public transportation.
Appliances: Some appliances might seem non-essential, but frequent usage or high external costs might justify their purchase.
Mobile phone: Having a mobile phone is almost essential today, but that doesn’t justify the need for the latest, most expensive model.
Social costs: Spending on social activities is important for mental health and wellbeing, but these costs can escalate if unchecked.
Gifts: Though not a strict need, giving gifts can be important for relationship building and personal satisfaction.
The 50/30/20 Budgeting Framework
The 50/30/20 approach simplifies budgeting by breaking down your expenses into three main categories:
50%: Living expenses (needs)
Allocate about half of your income for essential needs.
30%: Discretionary spending (wants and weeds)
About a third of your income goes towards non-essential purchases.
20%: Savings
– Set aside a fifth of your income for retirement savings and unexpected expenses.
Maintaining a budget isn’t about eliminating wants altogether; it’s about understanding the difference between wants and needs when planning your budget and making conscious decisions about your spending. It leads to greater financial awareness, control, and ultimately, a more balanced and fulfilling life.
