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Home » Budgeting, Live

Wants vs. Needs: How to Turn Grey Into Black & White

Last updated by on 9 Comments

At their simplest, expenses really fall into two different categories:

1. What you need: the things that you need to survive and function effectively in society: food, heat/electricity, a means of transportation, clothing, and water. I’ll even throw in basic telecom and insurance.

2. What you want: everything else.

The problem, of course, is that even in the category of things we “need”, there is a ton of grey area.

“Transportation”, for example, could mean a lot of things, based on an individuals interpretation. It could mean a pair of shoes, a bike, a bus pass, a subway pass, a POS car, or a $50,000 all-wheel drive luxury SUV that gets 15 miles per gallon.

“Food” could be translated into cheap bulk generic grocery purchases only or getting sushi for takeout every night and feeding Fido prime rib.

“Telecom” could be a $10/month prepaid plan or high speed internet, VOIP, and unlimited 4G on a brand new iPhone.

Justifying Our Purchases: Making Wants Needs

The end result is that most of us err to the market standard (which is ever-increasing), as determined by marketers and subsequently, our peers. We all strive for acceptance, we are social beings by nature.

Our brains are naturally hard-wired to do things like justifying upgrading from a serviceable car to a brand new base model. And then from a base model to a loaded model. We ask ourselves rhetorical questions in order to build a case for the justification (and soften the guilt after the purchase):

  • wants versus needs“Why replace a radiator when the engine might go any day? I should get rid of this before it goes completely.”
  • “Why get base model steel wheels? People want alloy wheels, and when I go to sell the car, I don’t want to have trouble selling it.” (side note: steel wheels are WAY more durable, providing a better driving experience and less tire wear)
  • “I want to be safe in the winter, so I should get 4-wheel drive.”
  • “If I’m going to spend this much on a car, I might as well get the color I want.”
  • “The hybrid version gets 5 more miles per gallon. I want to help save the environment.”

Over time, these discussions in our heads tend to wear us down until eventually we give in and wants become needs. That common, and dangerous territory.

Cutting down on impulse purchases from the aforementioned “want” category is a key pillar of sound personal finance strategy (I’ll address in further detail in an upcoming post). But more importantly, perhaps, is turning the grey area in the needs category into black and white. These, after all, are the expenses that we usually pay for every single month. It’s a totally different game that requires a bit more effort and discipline.

Separating Wants and Needs

My best suggestion on how to do this is to go through this 4-step process:

  1. Document your average monthly expenses in each category using this spreadsheet: If you’ve used my older budget spreadsheet in the past, you probably already have totals handy. It wouldn’t hurt to update them and plug them in to the new spreadsheet. If you haven’t already done this, credit card & bank statements should be all you need. It shouldn’t take more than an hour or so to do. Note: you’ll need to sign in to Google Docs to make a copy of the spreadsheet to edit.
  2. How low can you go? You see what you are spending (column b), but how low can you reasonably take each category (column c)? Take justification out of this step – you need to be 100% honest with yourself in order to make this work (it won’t be easy). If you want a few suggestions, check out my list of money saving products & services that I recommend. I suspect you’ll find that food, transportation, rent/mortgage, and telecom are the areas where you will have the biggest discrepancy between your current spend and your lowest reasonable spend. The spreadsheet to help you track the difference, and annual savings. I would strongly encourage you to plug the monthly savings numbers into an investment calculator and assume an 8% annual rate of return for the next few decades to see the true financial opportunity lost.
  3. Switch for two months. In each category, try switching to the lower priced alternative for two months, minimum. If you have a car, try biking/walking/busing/carpooling to work for two months. If you dine out a lot, try only cooking at home for two months. If you have cable, try going without it for two months. You get the idea. To prevent shock, try just one or two categories at the same time. It will be a life changing experience, guaranteed.
  4. Ask yourself one question after the two months is up: “Is my financial independence worth compromising for the (fill in the blank higher cost) alternative?” Any time you try justifying making the jump to the more expensive alternative, refer back to the spreadsheet and this question.

The Long-Term Impact

Sacrifice is in the eye of the beholder. Some of the possible changes you could make may seem difficult at first – a huge sacrifice – but a year or two from now, you may have a completely different perspective. Who knows, you may just find out that you like your new found frugality.

If you don’t think this practice could have a big impact on your financial situation over time, consider this example:

You are 25 years old and spend $400 per month for auto payments for the next 50 years. If you were to instead go with a used car that costs you $150 per month (for a $250 per month savings) you’d save $150,000. If you invested that money and got an 8% annual return over those 50 years, you would have just shy of $2 million! That is much higher than the average retirement savings (just over $18,000), and most people will never get to that level. This example does not take inflation into account (I shudder to think what a new car payment will be in 50 years), which would further add to the overall cost. And this is only one common monthly expense.

Debatable sacrifice. Huge Payoff. That is the goal here.

Wants Vs. Needs Discussion:

  • How do you separate wants from needs? What tips do you have from others?
  • How much could you be saving per month, according to the exercise?
  • What categories could you be saving the most in?
  • What kind of purchase justification discussions have you had with yourself?

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About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 7,500+ others by getting FREE email updates. You'll also find every post by category & every post in order.


9 Comments »
  • Will says:

    For me, nothing is inherently a want or a need, it all depends on how much I’m at risk of spending. For example, cell phone service is a need, but my actual cell phone and service plan is a want. Food is a need, but shopping at Whole Foods is a want. Entertainment is a need, buying the latest videogames is a want.

    I budget according to my needs, save according to my goals, and satisfy a couple of wants on a regular basis. That’s how I do it.

  • G.E. Miller says:

    Hi Will,

    What you’ve described is similar to what I’m suggesting here. The goal being to price out a move from a higher priced want to simply satisfying a need. In some cases, they may be the same or very negligible. But in cases like rent, telecom, food, and transportation, there is usually a huge discrepancy between the two.

    Identifying and looking at the long-term savings impact of those discrepancies can be enlightening. And making the switch from a want to a need can be less painful than imagined.

  • There was a time when more things fell in the want column. As time went on wants started to shrink and needs took precedent. I’m grateful it work for me like that. Some people struggle all their life trying to keep the two in balance. The earlier you get yourself in balance the more money you’ll have to show for it.

    Thanks for this great post. You put so much effort into your work, it’s greatly appreciated.

  • Spendthrift says:

    8% annual return for 50 years? C’mon. That’s highly unlikely to say the least.

  • Kyle Ambrosas@ContractorsCapital says:

    There is some really great stuff here. You touched on what is most certainly the most difficult thing for people struggling with their personal finances: being honest about what is a need and what is a want. As human beings (and maybe particularly as Americans), we feel that if we have money, we should spend it. It seems that no matter how much people make, they don’t have any money. Don’t stretch yourself to barely afford a bigger house, nicer car, etc. Living within your means is an age old art that could use a renaissance

  • Johnny says:

    One thing we have done that has worked well for us is carpooling. My wife and I work in the same part of town and our daughter’s day care is nearby so we decided to try carpooling out for awhile. Having to put gas in one car during the week is critical as our commute is about 20-25 miles. The biggest challenge is getting up much earlier for me (wife’s a teacher), but we spend more time together as a family, which is pretty cool.

  • John says:

    This kind of advice really makes a difference over time. Because we always lived within our budget and also put away as much retirement as was allowed, we were both able to fulfill our dream. Instead of working at the same job until retirement, last year, I quit my job, got rid of most of my stuff, and moved to China to teach.

    The pay is not great – but it is actually easy for us to save even more here (not counting things like retirement). My retirement funds are now on autopilot, I have no bills except my house payment (my kids are living there and pay the rent) and I get to live overseas!

    Whatever you do – don’t blow all your money now when it can make your dreams come true in the future.

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