One of the biggest challenges in developing and living on a budget as well as avoiding credit card debt is determining needs and wants.
Simply put, needs are things you cannot live without:
If the purchase is for something necessary to survive, it’s likely a “need.” Needs are the items or costs you need to live:
- rent or mortgage payment
- transportation (car loan, public transportation pass, etc.)
- utility bill
- food
- basic clothing such as jeans without a designer label, especially for children
Even within this category, however, are different levels of wants and needs. For example, a winter coat when it is snowing outside is a need, but a new shirt to change up your wardrobe is a want. Cooking inexpensive meals at home is a need, eating out at fast-food restaurants or getting take-out is a want.
Wants are things that would be nice to have, but are not vital to your survival:
The item is probably a "want" if it is possible to delay buying an item, substitute something less expensive, or to use something you already own. Wants are discretionary expenses — things you might want but don’t need to live. Almost every experience and activity, from after-school sports to “shopping therapy” is a want, such as:
- Eating out;
- Going to the movies;
- New clothes bought just because they’re the new style, when your older clothes are still stylish and functional;
- Cable TV;
- Cell phone ring tones;
- Text messaging.
Think before you spend:
- Before you buy something, ask yourself, “Do I need this item, or do I just want it?” You may be surprised at how many things are actually “wants.”
- If you have found that spending your money on wants makes you feel good so you forget your troubles for a while, remember how you feel when the bills arrive. Usually the euphoria is long gone and you’re left with worry at paying bills you can’t afford.
- Think about what things are necessary for your day-to-day existence. Write a list of them. Why do you feel these things are necessary?
Information is power:
Now that you have an idea of the things you need versus the things you want, incorporate this into your budget and use this information to set financial goals for yourself, whatever they may be.