Distinguishing Between Wants and Needs
The secret to sustaining yourself from day-to-day while also reaching financial goals is building a budget that balances your needs with your wants. Pinpointing the difference between the two is a subjective proposition. In 2005, Senator Elizabeth Warren and her daughter Amelia Warren Tyagi penned a book titled "All Your Worth: The Ultimate Lifetime Money Plan" that proposes a viable way to distinguish between wants and needs.
In the book, the pair introduced the "50/30/20 Budgeting Rule." This method of budgeting, which calls for devoting half of your net income to your needs and then splitting the difference on the remainder between wants (30%) and savings (20%), is often cited as a reliable way of managing expenses.
Before you can gauge how practical this approach might be for you, however, you have to determine how everything gets divvied up. The process of distinguishing between your wants and needs may seem fairly straightforward. As you may discover, though, seemingly universal absolutes don't necessarily apply here.
Understanding Needs vs. Wants
Needs are easier to nail down. You need a place to live, clothes to wear, and enough food and water to maintain your health—these are the elemental things that you need to survive. They're indispensable. You can argue that everything else is not imperative, but this is where the line starts to blur. Fact is, we make many of our purchasing decisions subjectively rather than objectively.
For instance, some people consider healthcare to be a necessity. For others, benefits are a luxury. When the Affordable Health Care Act was passed in 2010, people began facing stiff fines for going without coverage. Despite this federal mandate, millions of working Americans remain uninsured because they're simply unable to afford the premiums.
Other purchases can technically be categorized as a need, even though most would consider them a want. Does eating an expensive meal at a high-end restaurant qualify as a need? Or what about clothes? Do you have to stick with generic sneakers or can you splurge on a pair of expensive Yeezy Boost shoes by Adidas? Ultimately, it's all about perspective and how you choose to manage your money.
Deciding What Is a Want and What Is a Need
Figuring out how to divide your income and prioritize your expenses can be as simple as putting everything down on paper. Prateek Vasisht, editor of TotalFootball and the Business Design Rover, posted a blog on Medium dealing with this exact topic.
In the piece, he recommends using a variation of the Growth-Share Matrix 2x2 grid developed by the Boston Consulting Group in the early '70s. The practice calls for listing your wants and needs individually in four different categories. The visualization technique allows you to see where your expenses fit clearly.
Categorizing your priorities, the chart allows you to list your wants in one column and your needs in the other and then divide the columns in half and designate the top choices as a high priority and the bottom as low priority. From there, you can make informed decisions.
Vasisht also suggests trying out the MoSCoW method (which stands for Must Have, Should Have, Could Have, and Won't Have). Like the Growth-Share Matrix, the MoSCoW prioritization technique, conceived by Dai Clegg in his book, "Case Method Fast-Track: A RAD Approach," involves breaking things down in four different categories.
Appreciate What You Have
Once you become better at differentiating between wants and needs, you'll probably see that you've been able to fulfill more of your desires over the years than you realized. And that can be a significant turning point.
When you find things that you want to buy or do that you currently can't afford, it becomes all too easy to focus on those things to the point of overlooking what you already have. Don't trick yourself into feeling deprived when you aren't. Take time to reflect on all the ways that you've been fortunate. Then, decide what's really important to you, and go after it.