published 2023-06-14 13:00:00 2023-06-16 13:00:00 2,5,8 The Difference Between Needs and Wants /content/thumbnails/p-60-needs-and-wants-1-small.webp needs-and-wants The fundamental difference between needs and wants is that needs are regarded as necessary for survival and well-being, and everything else is a want. In real life, of course, the distinction is more intricate. Let's explore the distinction between needs and wants and aim to identify their boundaries.

Budgeting: The Difference Between Needs and Wants

The fundamental difference between needs and wants is that needs are regarded as necessary for survival and well-being, and everything else is a want. In real life, of course, the distinction is more intricate. The boundaries between needs and wants can be indistinct and vary among different people. Let's explore the distinction between needs and wants and aim to identify their boundaries.

The Difference Between Needs and Wants

How to Tell a Want From a Need?

It's a common budgeting advice to allocate certain percentages of income into "want" and "need" categories. In personal finance, a need refers to something essential for survival and functioning. A want is something that is not crucial to survival and functioning, even if it may enhance the quality of life. The most basic needs are food and water, shelter, and healthcare. But in the modern world, the list extends beyond the essentials required for physical survival. For example, the needs may also include transportation, among other things, so we can go to work and earn money to pay for food, utilities, and medical care.

One approach to differentiating between a need and a want is to determine if its absence would cause harm (McGregor et al., 2009)1. For instance, consider the situation where your car, which you rely on for commuting to work, breaks down. This incident directly impacts your ability to earn an income, thereby causing harm. Hence, your car becomes a necessity. Conversely, if you were to cancel all subscription streaming services, while it might lead to boredom, it would not result in any tangible harm (in fact, it might even encourage you to read more books at little cost or for free).

This line of reasoning might lead you to conclude that any car you desire is a need, given its necessity for commuting to work. This is where the situation becomes more complex.

When Needs Turn Into Wants

It's common for us to rationalize that our wants are actually needs and spend more money on them than we should. Needs become wants when we meet our basic needs but then go far beyond what is sufficient. For example, purchasing clothes is a need, but buying designer clothes or consistently opting for fast fashion brands is a want. Buying food is a need, but ordering take-out or dining out falls into the category of wants.

Let's further explore the above example of vehicles used for commuting to work. It's tempting to believe that since you unquestionably need a car, you might as well indulge in something you've always desired - a luxury car with leather seats, a moonroof, and all the features that come with higher trim levels.

But it becomes evident that it's a "want" when we apply the earlier method of assessing whether substituting this vehicle with much cheaper options, such as a used economical car, would cause any harm. Choosing to purchase a $15,000 vehicle instead of financing a $70,000 one does not entail any catastrophic consequences (it's worth noting that perceived reduction in social status should not be a factor in construing the outcome).

Needs Disguising as Wants

There are certain things that we consider as wants or goals to address at some point in the future. In reality, these are matters we should have started addressing long ago. For instance, there is no better time than the present to begin funding an emergency fund, preparing for significant expenses like purchasing a house or saving for retirement.

At some point, most of us will face unexpected circumstances or emergencies. We must be prepared for these unforeseen events, making it a necessity to save money for an emergency fund. Our earning capacity will inevitably decline, and health-related expenses will increase as we age. For that reason, building a retirement fund is a vital need.

We can also apply the previously mentioned method of distinguishing between needs and wants in this scenario. Would the absence of sufficient funds to deal with an emergency or being inadequately funded for retirement lead to any negative consequences? Most certainly.

Balancing Wants and Financial Goals

Of course, not all "wants" pose a threat to our budget and financial objectives. We desire more than mere survival and seek an exhilarating life. Some "wants" contribute to maintaining our mental well-being. For instance, taking a vacation fits the profile of a frivolous want, but we may be drifting towards burnout if we don't give ourselves a break.

However, as already mentioned, it's easy to rationalize transforming wants into needs. If your priorities are not fully addressed, it's unwise to convince yourself that satisfying short-term gratifications, such as constantly upgrading to the latest tech or frequent pedicures, are genuine needs solely because they make you feel better and temporarily boost your mood. Remember, you hold the responsibility for managing your budget and only you can make the correct choice.

How To Know What is a Need or Want When Budgeting?

To determine whether an item belongs in the "want" or "need" category, ask yourself, "Is this something necessary for my survival and functioning? Will excluding it from my budget cause any significant harm?" If the answer is no, then the item probably falls into the "wants" category.

Examples of Needs and Wants

  • Buying clothes is a need, buying designer clothes or consistently opting for fast fashion brands is a want.
  • Transportation needed for employment is a need, financing or leasing a new car that is beyond your budget is a want.
  • Renting an apartment that fits your needs is a need, renting a luxury apartment with a doorman, on-site gym, pool, and indoor parking is a want.
  • Buying food to prepare and bring lunches to work is a need, opting for convenience and regularly ordering food or dining out is a want.
  • Healthcare is a need, elective cosmetic procedures are a want.
  • Purchasing basic furniture for your home is a need, buying high-end, luxury furniture is a want.
  • Sanitary products, dental care, and other hygiene practices are a need. Treating yourself to a spa day or getting regular manicures and pedicures falls into the category of wants.

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References

  1. McGregor, J. A., Camfield, L., & Woodcock, A. (2009). Needs, wants and goals: Wellbeing, quality of life and public policy. Applied research in Quality of Life, 4, 135-154.

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