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Needs vs Wants: How to Tell the Difference

4 min read

Summary: Sorting spending into needs and wants is one of the simplest budgeting skills. It is not always easy, and it is fine for the line to be a little blurry.

What the words mean

The US Consumer Financial Protection Bureau (CFPB) uses two plain groups:

• Obligations, or needs. Things you must pay to live and work. The CFPB says these typically include a mortgage payment or rent, utilities, healthcare and childcare.
• Wants. Things that are discretionary, which means you choose them. The CFPB gives examples such as a gym membership, a cable subscription, or buying coffee each morning instead of making it at home.

The CFPB also notes that wants can be harder to spot than needs. That is true for most people, and it is a good reason to look at your real spending rather than guess.

Why it helps

Once you can see which spending is a need and which is a want, you know where you have room to change things. The CFPB says that if wants take up too much of your spending, you can cut back on some of them in the month ahead. It also suggests using the breakdown to set priorities, for example paying bills on time, getting control of debt and saving for the future.

You do not have to cut everything you enjoy. The CFPB's spending worksheet even suggests deciding how much to set aside for special occasions, so you can enjoy life without overspending.

Steps

1. List your spending. Use a month of bank or card history. If you have not tracked it yet, our guide on tracking your spending for a month shows how.
2. Mark each item N or W. N for need, W for want. Do it quickly and do not argue with yourself.
3. Look at the grey areas. Some items are part need and part want. Food is a need, but a restaurant meal may be a want. A phone can be a need, but the most expensive plan may not be.
4. Ask a few questions. Do I need this? Would I notice if it stopped? Am I using it? The CFPB suggests asking whether you are paying for subscriptions you do not use.
5. Choose one want to reduce or pause. Pick the one that you will miss least.
6. Decide what the saved money is for. Give it a job, such as a savings goal or a bill.

Watch for extras you did not choose

Some wants arrive without you picking them. Your Europe, the EU's official guide for citizens, says that extras such as express delivery, gift wrapping or travel insurance need your explicit consent. A pre-ticked box does not count as consent. So when you buy online, look at the basket before you pay. For more, see our guide on hidden fees and extras.

An example

This is an example with made-up amounts.

Jo's monthly take-home pay is 1,600. After sorting a month of spending, Jo finds needs of 1,000 (rent, utilities, transport, basic food and a phone plan) and wants of 400 (takeaway, streaming, a gym and clothes). The remaining 200 goes to savings.

Jo sees that takeaway is 120 of the wants. Jo decides to cook at home on some nights and cut takeaway to 70. That frees 50. Jo moves the 50 into the savings goal. Jo keeps the gym because it is used every week. The point is not to remove all wants, only to choose them.

Be kind to yourself

Spending on wants is not a failure. Many people like to treat themselves, and the CFPB lists "I like to treat myself and others occasionally even if I can't afford it" as a common challenge. The aim is to treat yourself on purpose and within your plan.

If you feel stuck, try a different approach. Some people set a small fixed amount for wants each month and stop when it is gone. The CFPB suggests setting a weekly limit for small purchases and, if you like, putting that amount aside in cash at the start of the week.

Where this fits

Needs and wants are the base of rules such as 50/30/20, which has its own guide on our site. They also help when you make your first budget.