Perhaps the most important Principal of Budgeting is separating a NEED from a WANT. This is a problem which many people who start out to face because they can’t imagine their life without a particular expense – thus categorizing it as a NEED. But when push comes to shove, it is very important to distinguish between the two. Let me help in categorizing the two for you.
Technical vs Real Life Difference
If you ask an economist, he’ll define a NEED as something critical for your survival – without it, you’ll cease to exist. Things like food, water, and shelter. A want, however, is something which you simply DESIRE – something you may or may not be able to obtain.
Now a NETFLIX subscription, because you can’t wait to know what will happen after the cliffhanger that you were stuck in is a Need or a Want? It’s a WANT, which you really need, isn’t it? 😃 Sorry, but that is the truth, and in the world of Personal Finance – there is no escaping it.
Your internet connection, I’m sorry to say, is also a WANT. This of course changes if you work from home, and in that case alone it’s a need (by the way, you should classify this expense as a Business Expense, instead of a Personal Expense). If you are using it to watch YouTube videos, checking in to Facebook and Instagram, and browsing through internet shopping sites – it’s definitely a WANT.
The same applies to hair dye, your television, your iPhone, – all WANTS. Why? Because you can survive without them. They are not a necessity for you to live, no matter how badly you need them.
When expenses turn Grey
If you look at your groceries, they are a combination of your needs and wants. No one claimed that all your expenses are neatly organized in a NEED or a WANT. Flour, Bread, Cooking Oil, Milk, Eggs, Fruits, and Vegetables are needs. Chips, Ketchup, Biscuits are a WANT – especially if you are buying those high-end expensive ones. Parle-G is a WANT unless you are using it as a substitute to expensive baby formula’s to provide nutrition for your baby (many people in India do that). I think you can understand, where I am going with all of this.
If you are able to distinguish your WANTS, from your NEEDS, you’ll be in a better position to control your budget. This is especially helpful during those odd times when your Budget spills over. If you are taking a decision to spend the money on a WANT, then you can chose not to buy that item and redirect that money on something else in your budget. That is why knowing this difference is so helpful.
Your WANTS define a lot about who you are, what are your values, and what do you keep as a priority. It defines you in a very large way, so it is essential to know what exactly they are.