Needs vs. Wants: How to Tell the Difference in Your Budget

Your budget list includes rent, a car payment, a phone bill, and groceries. But after you’ve paid the main items on your list, you have less money left over than you would like. So which of those costs can you realistically cut?

In budgeting, sorting out your needs and wants helps you determine what you could do without. Start with the bills that are easy to categorize, like rent or a car payment. The ones that aren't as obvious are where there might be wiggle room.

What is the difference between needs and wants?

A need is something you can't do without: what you need to live, what you need to earn your income, and what helps you keep the money and property you already have. A want is an extra that's nice to have but that you could choose to live without.

Here’s a key question you can ask of any expense: Could I still live, work, and keep everything protected without this? If the answer is no, it's a need. If it's yes, it's a want, however much you'd miss it. By that test, food is a need. There’s further nuance in the details, though: you need food to live, but you don’t need to get your food from restaurants. It costs more to eat out than to prepare your own meals. Restaurant meals are a want.

Cover every need first, then spend on wants.

Some needs cost about the same each month, like rent. Others change from month to month, like groceries. Label each bill with the need test, not by whether its amount changes.

Examples of needs and wants

Needs are the bills that keep you housed, fed, insured, and able to get to work. Wants are the extras, such as eating out, entertainment, and vacations.

The table sorts some common household expenses into the two groups:

How needs and wants fit the 50/30/20 budgeting rule

The 50/30/20 rule is a common way to split your net take-home pay (what's left after taxes and other deductions) into three percentages. It puts 50% toward needs, and 30% toward wants. It adds a third category, savings, for the last 20%. Debt payments beyond the minimums go into the savings category.

The rule is only a guideline, and not everyone can follow it. If your needs run over half, set percentages that fit.

Can a want ever become a need?

The things you need to get to work and do your job count as a need. Review your budget whenever your finances change, such as when you start a new job, move, or take out a loan. Say you keep a car only for weekend pleasure trips, and walk to work. You might consider that car a want rather than a need. But if a new job puts you a few miles from the nearest bus line, the car is your way to work, and it becomes a need. 

A need can be met in a basic form or a costlier one. A well-kept used car meets the need for transportation, but a new luxury car is a want.

The same is true of your phone. If your job expects you to answer calls and email while you're out of the office, a basic plan might be something you need to do your job. Treat a pricier plan or the newest model as an upgrade, and put that on your wants list.

Is a debt payment a need or a want?

The required minimum payment on a debt is a need, because if you don’t pay it, your costs are likely to grow, possibly by a lot. Needs include obligations you have to pay, such as debt, child support, and alimony. The minimum is the smallest amount you must pay each month to stay current and avoid fees and/or higher interest. If you use the 50/30/20 rule, you may see versions that list all debt payments (minimums and extra) in the savings 20%. If you’re counting minimums as needs, put only the extra in the savings category.

Pay at least a credit card's minimum by the due date, so no late or missed payment goes on your credit report. If you pay late on a credit card, you risk a late fee, a higher interest rate, and a lower credit score. A late payment on your credit report can stay for up to seven years.

When you haven’t made a minimum payment for four to six months, the creditor may charge off the debt, writing it off as a loss. But you still owe it, and your credit continues to suffer. With a car loan, a missed payment may bring you to (or closer to) the lender’s definition of default. In many states, the lender can then take your car.

If you're already behind on debts, see step 3 of the Bills Action Plan below.

How to sort your expenses into needs and wants

List every expense for a month, label each one using the need test, and add up the needs and the wants.

• Track a full month. Record what you earn and spend for a whole month, so every bill shows up. Keep receipts in an envelope, and write down anything you don’t have a receipt for.
• Sort into categories. Put each expense in a category, such as housing, utilities, groceries, or dining out, and add up each category.
• Label each category. Ask yourself whether you need an item to live, work, or protect what you have. If so, call it a need. If not, label it a want.
• Settle the gray areas. Where you can, split each expense into its basic version (the need), and its upgrade or fancier version (the want). Some items may seem hard to categorize. Pick the category you can most easily back with a reason from the need versus want test, such as, "I need it to get to work."
• Separate debt payments. Give them their own lines. Put each minimum with your needs, and if you’re using the 50/30/20 rule, put payments beyond the minimum into the savings category.
• Total each group. Add up the needs, then the wants.

Here is a sample month sorted with those steps. Your own bills will differ, and the same labels apply.

Needs come to $2,050 and wants to $230, for $2,280 in all.

Bills Action Plan

1. List and label one month's expenses. Use your bills, pay stubs and bank statements to list each amount, then mark it a need or a want.
2. Decide each gray area and debt payment. Put basic versions and minimum debt payments with your needs.
3. Compare your needs with your take-home pay. Subtract your bills and expenses from your average monthly take-home pay, needs first. If your wants cost more than what's left, cut them back. Put whatever is left after wants into savings. Working up to a 50/30/20 split could take some time and practice.

If needs alone take up all your pay and you're behind on bills, try asking your creditors for a lower rate or a more affordable payment plan. Consider looking into assistance programs such as the Supplemental Nutrition Assistance Program (also known as food stamps) and the Low Income Home Energy Assistance Program (for help with your utility bills). Dial 211 for help near you, or find more options under help paying bills and personal finance.

Key Terms

Take-home pay: What's left on your paycheck after taxes and other deductions come out, also called net income.

50/30/20 rule: A budgeting rule of thumb that plans 50% of your monthly take-home pay for needs, 30% for wants, and 20% for savings.

Fixed expenses: Bills you pay every month at the same amount, such as rent or a loan payment. 

Minimum payment: The smallest amount you must pay each month on a loan, line of credit or other debt.