The key to financial stability is learning how to use the income you generate to your advantage. In order to set up a budget that will help you live within your means, it pays to understand the difference between needs vs. wants. Even before you start to create line items in your budget, the distinction must be clear. Here are some basics to help you get started.
A more common term to apply here is basic living needs. This conveys the message that what you are placing in this category is expenses that are absolutely necessary to your wellbeing. Without these, you will find life pretty tough.
There are only a few basic living needs that most people have. You do need a roof over your head, so that means either rent on an apartment or a mortgage on a home. Utilities for your home are also essentials. Food is a must if you want to remain healthy, so that means setting aside money for groceries. Clothing is another example of a need.
You will find that some people view a few other expenses as basic living needs. Health insurance is a prime example. The right plan will ensure you can pay for medical care when and as it is needed. Education is another type of expense that some consider to be a basic living need, while others believe that anything more than a high school diploma is great but not essential. You’ll have to judge for yourself to decide where these things fall in the needs vs. wants spectrum.
What About Wants?
Wants are essentially anything that you cannot reasonably define as a basic living need. Maybe you would love to have the latest tablet or smartphone, but what you already have still works just fine. A new car would be great, but your old one is in great condition and showing no signs of breaking down. Right now you want a new car, but you do not need one.
Understanding the difference between needs vs. wants will help you pay for what matters first, then decide what extras you can afford. Use this process and you reduce your chances of ending up in a financial bind.