What's the Difference Between Needs and Wants?
Some of your core needs are pretty easy to identify. They are the things you absolutely cannot do without if you are to survive and live in today's world. You need a roof over your head, sustenance, access to primary utilities like water and electricity, and clean clothes to wear.
Things and experiences that enhance one's lifestyle, such as a 3-day staycation to celebrate your birthday, subscription to streaming services, dining out, or expensive sneakers even if you already have several other pairs, can be classified as wants.
Your priorities are dictated by your career, civil status, living arrangements, and various life circumstances. Those of you with families may classify rent, mortgage payments, car payments, child's education fund, healthcare, and life insurance as needs. Meanwhile, healthcare may be a luxury for families with tighter budgets.
Needs weigh more than wants for obvious reasons, but remember that wants are also essential since they add to your happiness. This is why learning how to budget for financial wants is a vital skill that must be cultivated for a well-balanced life.
Both needs and wants are subject to change depending on where you are in life. You may have to make adjustments or reallocate resources at any time to ensure that they are maximized, so periodically revisiting your budget is a must.
How to Budget for Needs and Wants
There are several ways to create a smart budget that allows you to split your hard-earned pay between your needs and wants. Make informed decisions about budgeting for both with these steps.
1. Identify your needs and wants
You can use the MoSCoW model to help you identify your wants and needs. MoSCoW stands for Must have, Should have, Could have, and Won't have. It's a technique used in systems development, which can be modified to help you make a chart to visualize your expenses clearly, from most important to least important.
The low want/low need quadrant is at the bottom left, where you will put things that you do not want and need.
Twin diagonal quadrants that mirror each other are the low want/high need categories, which are expenses that can be delayed despite being important.
The high want/low need category is where we place expenses that make us ask if we truly need them at the moment. Knowing which ones hold real value to you is essential when filling this space.
At the top right quadrant is the high want/high need category, where we put the items we prioritize most. Make sure to think things through and carefully evaluate if those wants are really what you need at any given time.
2. Assess your current lifestyle
While the grid system can help you prioritize wants and needs, it's just one part of the equation. There are many gray areas when classifying these two categories, which can lead to overspending on wants under the pretense of filling real needs.
Avoid this by making a list of all your expenses and identifying those specific categories where you can cut costs. Splurging on some items at certain times is fine, but make sure it's always within your budget. You don't want to nosedive into a crisis that could potentially cripple your finances for the long term.
3. Try the 50-30-20 rule
Designed as a plan for working-class families, the 50-30-20 rule is a simple budgeting method where you set a fixed portion of your after-tax income for three main categories:
- Needs - 50%
- Wants - 30%
- Savings - 20%
Savings will be a broad category that may include retirement contributions, money set aside for a house, or a specific monthly deposit for other financial goals you may have.
4. Zero-based budgeting
Zero-based budgeting or zero-sum budgeting is where you allocate all your monthly income to expenses, savings, and debt payoff so that you will have ₱0 by the end of the month.
Know how much your monthly take-home pay is, decide how you'd like to spend your money and dedicate every peso to specific expenses so that you know exactly where your money goes each month. This budgeting method helps prevent overspending on wants since you dispense part of your budget to where it needs to be.
5. Envelope budgeting
This old-school method involves using envelopes to organize your money. Each envelope will contain the specific amount of cash you're allowed to spend on a particular category.
Label every envelope with different spending categories, and don't borrow cash from other envelopes. If there is still money remaining in any of the envelopes after the cutoff period, you can keep it there or reallocate it to another spending category for the next budget cycle.