- Date : 28/03/2022
- Read: 3 mins
What you need is not necessarily what you want, and segregating the two things can help you keep your finances in order. Budgeting rules should be followed to keep a check on your spending and improve your financial situation.
We frequently use the terms needs and wants in economics, but have you ever considered how they differ? Economic theories investigate the functions of production, distribution, and consumption. It all boils down to making decisions about allocating scarce resources to maximise their usage while also satisfying human wants and needs. However, differentiating between the two - wants and needs - is a matter of opinion.
Difference Between Needs and Wants
When it comes to acquiring or possessing specific objects, the phrases 'want' and 'need' are frequently interchanged. The way these two phrases are used in various situations can make you think that they have similar, if not the same, meanings. However, these two economic terminologies are significantly different in practice.
Needs are things that are required for survival. Wants, on the other hand, are things that you would like to have, but the absence of those things won't affect your survival. To properly spend and save money, everyone must understand the difference between needs and wants.
How to Determine What are Needs and What are Wants
Although distinguishing between wants and needs appears to be a simple task, it may be challenging. Some things can be segregated into needs and wants quickly, while others need deeper deliberations. The basic necessities for survival include a place to live, clothing, and enough food and water to be healthy. They are necessary; thus, they can be considered needs, and everything else can be termed as wants. However, this is where the lines start to blur.
The truth is that we make many of our decisions, be it for food or clothing, based on emotions rather than logic. So, it needs a proper and sincere introspection to determine your need and what can be termed as your want. It is because the difference between need and want is subjective, and it may differ from person to person. For example, sending your kids to a private school may be a 'need' for you, but a 'want' for others. Hence, you need to analyse your specific case.
50/30/20 Budgeting Rule
The complex exercise of balancing your need and want is called budgeting. Creating a budget that balances your needs and desires is the key to meeting your financial goals. In their book titled "All Your Worth: The Ultimate Lifetime Money Plan", Senator Elizabeth Warren and her daughter Amelia Warren Tyagi suggested a practical method for distinguishing between wants and requirements. The authors introduced the 50/30/20 budgeting rule in the book. This budgeting rule, which recommends allocating half of your net income to necessities and dividing the remaining part between wants (30%) and savings (20%), is commonly cited as a reliable method of limiting expenses.
However, before you determine how useful this strategy is, you must first have a sound understanding of your needs and wants.
In a nutshell, it can easily be determined that needs and wants are separate forces, and they are different for every individual. Some people, for example, believe that healthcare benefits are a requirement; some others consider them to be a luxury. In general, a person's survival is jeopardised if needs are not met on time; however, wants are something that a person desires, but they do not threaten survival if not satisfied.
So, you should define your needs and wants as per your specific case