Budgeting Distinguishing Between Wants and Needs A Foundational Budgeting Skill By Erin Huffstetler Erin Huffstetler Website Erin Huffstetler is an expert on budgeting whose advice has been featured in The New York Times, Chicago Tribune, Forbes, and many other publications. She founded the My Frugal Home blog, and has also been published by The Spruce, TripSavvy, and Byrdie, among others. Huffstetler has a bachelor's degree from Maryville College. learn about our editorial policies Updated on November 3, 2021 Reviewed by Chip Stapleton Reviewed by Chip Stapleton Chip Stapleton is a Series 7 and Series 66 license holder, passed the CFA Level 1 exam, and is a CFA Level 2 candidate. He, and holds a life, accident, and health insurance license in Indiana. He has eights years' experience in finance, from financial planning and wealth management to corporate finance and FP&A. learn about our financial review board In This Article View All In This Article Understanding Needs vs. Wants Deciding Between Wants and Needs Appreciate What You Have Frequently Asked Questions (FAQs) Photo: Enis Aksoy/Getty Images Budgeting is a balancing act. 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 to divide everything up. Although the process of distinguishing between your wants and needs may seem fairly straightforward, these distinctions can be hard to discern. Understanding Needs vs. Wants Some 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 lines start to blur. The reality is, we make many of our purchasing decisions subjectively rather than objectively. For instance, some people consider health care to be a necessity. For others, benefits are a luxury. When the Affordable Care Act (ACA) was passed in 2010, people began facing stiff fines for going without coverage. Despite this federal mandate, millions of working Americans remained uninsured because they're simply unable to afford the premiums. Note The ACA fines have since been lifted, but the debate continues about where to draw the lines of what's essential. 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 Adidas? Ultimately, it's all about perspective and how you choose to manage your money. Deciding Between Wants and Needs 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, wrote about this exact topic. In the piece, he recommends using a variation of the Growth-Share Matrix developed by the Boston Consulting Group in the early 1970s. 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. You end up with the following four categories: High-priority needsHigh-priority wantsLow-priority needsLow-priority wants 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. Both of these methods help you to clarify which things should be the highest-priority items in your budget. 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. Take time to reflect on all the ways that you've been fortunate and the needs you are able to meet every day. When you get clarity about your wants and needs, you can determine what's most important and plan your budget to make those dreams a reality. Frequently Asked Questions (FAQs) Why is budgeting important? Budgeting is creating a financial plan for your life. By having a budget in place, you're less likely to fall into debt and you're more likely to proactively move extra money into savings or investments. How do market demands relate to needs and wants? The needs and wants of individuals collectively make up the "demand" in supply and demand economics. Both needs and wants are considered demands because customers expect businesses to supply them. Needs and wants have different levels of price elasticity and their impact on the market differs. That's why investors typically separate them into consumer staples ("needs") and consumer discretionary ("wants") sectors. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Elizabeth Warren and Amelia Warren Tyagi. "All Your Worth: The Lifetime Money Plan." Simon and Schuster, 2005. HealthCare.gov. "The Fee for Not Having Health Insurance." Boston Consulting Group. "BCG Classics Revisited: The Growth Share Matrix." ProductPlan. "MoSCoW Prioritization."