Do You Really Need To Break Your Expenses Down Into Wants Versus Needs?

February 14, 2019

When it comes to budgeting, the conventional wisdom is that we should divide our expenses into “wants” and “needs.” Even our own Expense Tracker worksheet does this. But I think it’s actually a waste of time and let me tell you why.

Want or need?

First, there’s no clear line between “wants” and “needs.” You should see the debates that often happen in our budgeting workshops about what’s a need versus a want. Many would argue that their morning coffee, smart phone, Internet access, and cable TV are all “necessities” while others would call them luxuries. The same debates can happen between couples or even internally.

It’s also not just that we have different ideas of what constitutes a necessity. Each category of spending is a mix of need and want. For example, food is clearly a necessity but most of what we actually spend on food probably isn’t. The same goes for clothing, housing, the car we drive and even electricity.

We don’t really need all of our “needs”

Thinking of certain spending categories as needs can also make us think of them as untouchable. Yet, some of the biggest sources of savings can come from choosing lower cost housing, driving an older car, spending less eating out, looking for discounts on groceries, and reducing cable and phone bills. Focusing on just the “wants” like entertainment and shopping can cause us to miss these opportunities, and blow our budget because we miss those things. It’s also important to be honest with yourself about this when a crisis hits.

Discretionary v. non-discretionary

Besides, unless you’re truly living on a subsistence income, I don’t know anyone who only spends money on wants. So if we’re going to spend on a mix of wants and needs, what’s a better way to characterize spending categories? I prefer to think of spending as discretionary vs non-discretionary.

This doesn’t mean we have no discretion over “non-discretionary” expenses. It just means we’re not exercising that discretion on a regular basis. For example, while it’s certainly not an example of good budgeting practices in any other sense, the federal government essentially breaks down its expenses into entitlement programs like Social Security and Medicare and discretionary expenses like our military and education programs. The difference is that entitlement programs are on auto-pilot while Congress and the President fight about discretionary spending every year.

How to classify

With your own budget, non-discretionary expenses would be things like rent or mortgage payments, insurance premiums, utility bills, and subscriptions. While they may fluctuate over time, they’re generally determined by decisions we make in advance like where to live, which mortgage and insurance coverage to get, and what cable, phone, and gym plans to sign up for. We should take some time and go through each of these to make sure we’re getting the best value for our money. But after that, they’re pretty much on auto-pilot until something changes.

On the other hand, we’re constantly making spending decisions about things like eating out and shopping. How much we spend on these items can also vary considerably from month to month. Rather than try to budget for each of them in advance, which can be pretty difficult, you can give yourself a fixed monthly or weekly “allowance” to cover all of them.

The idea is that you get to spend as much as you like but when the money is gone, it’s gone until the next allowance period. Likewise, whatever you don’t spend can carry over to be splurged in the future. You can then decide what feels more like a want versus a necessity with each purchase.

The reality is that almost every expense can be a “need” or a “want” based on your perspective. What’s important is that you’re prioritizing your spending according to what’s important to you. Arbitrarily splitting your expenses into needs and wants won’t do that. Thinking through each and every expense will.