Classifying wants and needs

We all have our ways of destressing after a long day. One of my weirdest and most beloved post-work, take-a-load-off strategies has always been cruising the aisles of gourmet grocery stores just to look at packaging. Give me an aisle of fancily bottled extra virgin olive oil, and I’ll need at least an hour. Nothing is more calming to me than fancy fonts on fancy jars of fancy imported foods.

I don’t even need to buy anything. Often I just stroll around, try a sample of pickled figs, and continue my stroll home. Sometimes though, I’ll splurge on a $3 glass bottle of spring water from some promised fountain-of-youth in Italy. This, to me, is the quintessential quandary of wants vs. needs: I need to drink water, but I don’t need it to come from a hydro-spa in Lurisia.

What’s a Want? What’s a Need?

There were a lot of comments in my last article about spontaneous spending as to how to determine wants and needs when budgeting according to the Balanced Money Formula in Warren and Tyagi’s All Your Worth. Whether you use their formula or not, figuring out the essentials of your budget is important. For those of you just tuning in, the balanced money formula says that 50% of your income should go toward needs, 30% to wants, and 20% into savings. I think this comment exemplifies some of the confusion:

The discussion went on to include a lot of grey areas:

  • Car payments. If you bought a new car, how much of the purchase was the need of a car as opposed to the want of buying new?
  • Rent. Is paying higher rent to live closer to work a want or a need?
  • What about student loans? We need to pay those off but we didn’t need to go to a fancy private school.

I took to the Balanced Money Formula because it gave me a way to not have to worry about the particulars each month. I was just so tired of not knowing where my money had gone at the end of the month, or trying to keep track of how much I was spending in a given week. If you know where your money is going, you don’t have to worry so much about it. First though, I had to iron out some of these grey areas.

Two Carts of Groceries

I wasn’t about to through the grocery store with two carts of groceries, one with dried beans and broccoli and one filled with ice cream and Perrier, so where to draw the line? Warren and Tyagi recommend using the USDA monthly allotment for food, which averages to around $250 a month depending on age and gender. Anything over and above that comes out of wants. I’ve heard of a few different systems for allocating this money. One is to use cash, about $65 a week, and put that in your wallet with your weekly wants cash. All food just comes out of that stack o’ bills.

Another idea is to have a debit card that debits directly from an allocated account. Personally, I use my phone to keep track of it all. The important part seems to be to find a system that doesn’t seem overly complicated to you and to stick to it. When the cash dries up, I’m brown bagging it the rest of the week to work.

Rent, Car, Loans…Netflix, Gym, Phone?

My needs category was way over 50% when I first looked at it. The stuff I had to pay each month was more nearing 70%. Outside of my monthly need of calories, what else went into my needs categories? For most, rent, car payments, student loans. Okay. What else are we contractually obligated to? Netflix memberships, gym dues, data plan? Uh oh, the grey areas seem to be growing.

Well, not exactly. What were my hardcore commitments? A lot of my monthly auto-payments started going away as I clicked “unsubscribe.” Since my monthly payments were above 50% of my income, I started eliminating the things that I could get for free, whether it be using the library for movies or just taking my jogs in the great outdoors. If I wasn’t willing to cut them completely, they transferred to wants. Fine. My digital subscription to The New York Times is a want. Ugh. You start to cut where you can barely feel it.

I should add that both in the book and here at Get Rich Slowly you can find great strategies for reducing your student loans (Whether or not your liberal arts degree was a need is no longer the question — paying for it now is.), finding more appropriate health insurance, and renegotiating your rent. All these things take work and research, but their reduction in monthly cost won’t hurt your current lifestyle and can help you reduce costs.

I still wasn’t under 50%. I had to look where it hurt a little more. The book recommends selling or downgrading your car, getting a roommate, trimming your health insurance bill, returning any rentals like furniture, and re-shopping childcare. For me, I have no car, no kids, I barely have health insurance and my apartment is a major part of my business. I just couldn’t. Well, I could, but it would require the next step, which would be what the book calls “radical surgery” such as selling your home for something cheaper, moving apartments, or changing jobs.

Also listed under “radical surgery” is taking in additional income. For me, it didn’t feel very radical or surgical at all so that’s what I did, far less painful than moving apartments at the end of my lease. I added five hours a week by taking on an extra gig, which takes away a few hours of my nighttime routine of drinking fancy bottled water and listening to Pandora One, but the extra income takes my needs under 50%.

But it Hurtsssss! Why Do This to Yourself?!

I do it because I sleep better. The Balanced Money Formula has a lot of variables, and I had to finesse what went where, but after I figured it all out, it was a deep breath. 50% is a sustainable number that allows me to live well and have fun. I had to give stuff up and take on some additional income. I had to figure out what went where and set up the system how I kept track of everything. I had to wait a while for some contracts to expire, like downgrading my phone, but ultimately, for me, it really works.

No one has all the answers for you and often, there isn’t an easy solution. It isn’t about being perfect, it’s about being empowered and doing the math to trust that your finances in balance, fudging it where you need, so you can sleep easy.

So how about it? What seems impossible to categorize? How can you bring more balance to your budget?

More about...Budgeting

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others

There are 80 comments to "Classifying wants and needs".

  1. Savvy Scot says 10 May 2012 at 05:07

    I like this approach. I just wrote a post on ‘Defining Purpose and the Importance of Moderation’ which discusses why you should not always cut back on these things!!

  2. Justin @ The Family Finances says 10 May 2012 at 05:11


    I really liked this article. You capture most of the difficulties in crafting and categorizing a budget. I just started looking into the 50/30/20 budget, and I’m finding a lot of the same things. Our needs come close to 70%, and I’m working on ways to reduce that. I definitely agree that grocery shopping is hard to split between wants and needs. I actually tried for a couple weeks to separate my grocery shopping into two separate transactions at the store (one for wants and one for needs), but I don’t think it’s really worth it. I’m looking forward to the rest of the comments here…

  3. Chris says 10 May 2012 at 05:14

    Hi, thanks for the post. How are you using your phone to keep track of things?

    • Tim Sullivan says 10 May 2012 at 10:56

      I use an app called PocketMoney that I only sorta kinda recommend. It was tough to set up, but allows me to do what I want it to, but still isn’t ideal. I get to categorize, but I end up spending a lot of time on the bus getting the thing to work right.

    • A-L says 04 January 2013 at 07:04

      If you’re looking for a way to track by phone YNAB 4.0 (which came out over in May or June of 2012) now has Android/iPhone apps to coordinate with its software program. You have a version of the budgeting software on your home computer and the app on your phone. They sync automatically, so if you’re at the store you can check your budget to see if you have enough funds for the purchase, and after making your purchase, you can put the expense in immediately.

      It’s a big reason why I decided to keep a smartphone rather than going to an old-school one. I figure the money I save by having that budget app helps to pay a significant amount of the added expenses of having a smartphone.

  4. Megan says 10 May 2012 at 05:19

    Cool post! I will need to look at my family’s budget and see where we stand. It is an interesting take on how to slash spending.

  5. Anthony @ Each Peso Counts says 10 May 2012 at 05:19

    I do the cruising part, but in my case, i tend to look at arts and crafts materials (part of being a speech therapist). Since Insaw JD’s allocation, it has been so easy to allocate, transfer and stick to my budget. Stare at my pseudo needs and put them into where they really belong.


    • Dogs or Dollars says 10 May 2012 at 06:13

      Love “psuedo needs”.

  6. Elizabeth says 10 May 2012 at 05:21

    I think this line pretty much sums it up for me: “If you know where your money is going, you don’t have to worry so much about it.”

    I tried the balanced money formula once and discovered I could make the numbers look however I wanted by shuffling things between “want” and “need”. (Like how much of my rent is “want” versus “need” – and is the dairy-free food I buy “want” versus “need”) The important thing for me is how much I save and whether my other expenses are in line. If I have the basic phone and internet packages, does it really matter much of the cost is need versus want as long as I’m getting value for my money?

    • Laura says 10 May 2012 at 08:18

      Yeah, I kinda thought the same thing. If 20% of income is going into savings and you’re happy, does it really matter how the 80% is split between wants and needs?

      IMHO, the distinction between “wants” and “needs” really only matters if that 20% isn’t obtainable or if you want to free up cash for another purchase. Tim’s comment “You start to cut where you can barely feel it” sums up for me where to cut, and if you have to cut where you CAN feel it, you keep cutting where you feel it least. Or increase income, which is basically cutting time used to increase income.

      • Steve says 10 May 2012 at 16:25

        It doesn’t matter if something is a want or a need if it fits in the 50%. So get that stuff down to 50% by radical surgery or whatever other means.

        However, there is more to the formula than just saving 20%. If you are saving 20% and need 80% just to live, you neither have room for error nor room for fun or spontaneity (not that spending and fun are fundamentally linked, which is a common misconception).

        • maggie says 11 May 2012 at 08:19

          I agree – I think the point is that in tough times, like if your income unexpectedly drops, “wants” can be dropped, but you still have to pay for your needs. “Needs” are kept below 50% so that you can make it thru those tough times with less pain.

    • El Nerdo says 10 May 2012 at 10:05


      I think you guys are slightly missing the point of the BMF.

      “Wants” vs. “Needs” is not a matter of “categorizing” things, just like priorities are not a matter of “prioritizing”. (For more on this idea please see this wonderful article: )

      Needs means survival, wants means disposable income. (And Savings means future survival).

      What the system aims to do is not to make you lose sleep over whether rice and beans are wants or if cheese is really a need. No, that’s not the point at all.

      The point is to free a portion of your income for pressure-free spending that does not threaten your survival. And by survival I don’t mean “hunting in the woods”, I mean covering your basic needs in your current situation. If you want to buy movie tickets or French cheeses or original paintings with it *it’s fine*.

      That’s what the 50/30 split does– it keeps your survival needs at a manageable level, so that you have leftover money to have fun in whatever way you want, and that includes good groceries or what have you.

      If you save 20% it’s good, but if your 80% is already spoken for at the beginning of the month and you can’t deviate from that without going hungry or breaking a contract and getting sued for it, then you’re doing it wrong.

      Because nobody should have to choose between paying rent or going to a restaurant, or filling up the gas tank vs. health insurance. Restaurants or movies or beer should fight against each other, not against your basic needs and financial commitments.

      By limiting your financial commitments to 50% and sticking to 20% savings, you have 30% to play with– and yes you can spend it all on nice groceries or whatever you want, but it’s no longer a high pressure choice. And if you lose your job tomorrow and can’t have fun and need to stop saving for a while you are instantly ready to survive on 50% of what you make today.

      • Sandy E. says 10 May 2012 at 13:11

        I read the book and have been following the formula for years and yes, agree with don’t miss the point. One thing I wanted to add to the discussion is that the authors recommended 20% for savings. However, they did also say that if you are in debt, then 10% should go to debt and 10% to savings. When your debt is paid off, then save 20%. (And another nice thing about this formula is that if you get a raise or a windfall, you can use the formula to calculate a 10% increase on your debt payment, 10% increase toward savings and so on.

    • Hanne says 10 May 2012 at 10:08

      I agree with this as well. The balanced money formula appealed to me initially, but when I really looked at categorizing things, it was almost impossible. For example, cooking is a major ‘hobby’ for my husband and me, and buying local, quality products is part of that (and also a big part of our ethical approach). It is next to impossible to break out wants/needs in that situation. I suppose we could use the USDA monthly allotment, but frankly $250/month seems low to me if I want to buy food in line with my ‘food ethics.’ And does a buying decision based on your personal beliefs qualify as a want or a need? In the end, I decided the better approach was to focus on the amount we’re saving, rather than categorizing what we spend.

      • Marcella says 10 May 2012 at 16:41

        But Hanne, say you and your husband lost your jobs, had to drastically cut costs, would you still be viewing cooking as a hobby, buying more expensive organic and local food? Or would you cut to the bare basics at just buy what food you need to live?

        I’m a foodie too, but I sure know that I wouldn’t be buying gourmet cheeses or nice wines if my income was cut. Therefore any of my spending above fairly basics is a need. Assuming you’d cut down, any difference between the two spending amounts is a want.

        Tim mentioned in one of the other comments, this doesn’t mean you need to track groceries in two separate baskets, just figure out the ‘base need’ value – say $70/week, then assuming you normally spend $150/week, the other $80 goes into your wants basket.

        • Marcella says 10 May 2012 at 16:57

          For some reason, I can’t edit the comment above… so

          Actually Hanne, I reread your comment after I posted mine and realised you took most of what I posted about into account already. I guess you’d have to really consider whether your food ethics are ever negoitiable. I.e. If you were in a dire financial situation would you genuinely choose between a more expensive locally sourced food product. and a cheaper one that may compromise your belief? If you genuinely believe your ethics simply cannot be compromised I think your answer may be you’d drop the ‘hobby’ portion of any food purchases and you’d probaby find a way to find way cheaper food which met your requirements. I.e. instead of eating local organic beef, you might bulk buy some dried beans from a local food co-op. So could you consider what that cost might be instead?

        • Heather says 13 May 2012 at 16:55

          I found that with a decrease of income, my desire to focus on cooking as a hobby INCREASES. I tend to cut out all other extraneous spending and buy good foods. Logic being that I HAVE to eat either way, so I might as well make it as enjoyable as possible and have fun with it. That could be a side effect of the fact that less income usually means more time. I still end up cutting my food budget because I reduce my “eating out” budget to minimum and can save money on a lot of the raw ingredients.

  7. David says 10 May 2012 at 05:28

    Hi Tim, I have noticed something special about this topic.

    I can be very disciplined when I want to be, but not forever.

    I think it is the same for other people too. We know what a need vs a want is. But we just can’t control ourselves when we walk by that cool looking cafe and we want to get a cake and a cup of coffee!

    So, spontaneous impulse buying is very important to businesses and it happens quite a bit.

    I suspect that ‘none’ of us are 100% immune to it. It is just a matter of how long we can keep our discipline up before ‘giving in’.

    • Rosa says 10 May 2012 at 06:12

      If your wants budget includes some money for occasional coffee trips (or whatever) then you can do that without messing up your budget – it’s when every single part of the budget is pre-allocated and any deviance means going over budget that it’s a problem.

    • Amanda says 10 May 2012 at 10:37

      David, the whole point of the BMF is you’ve got a 30% buffer for those “impusle purchases”. When you walk by a store and buy something you want and use the BMF it’s already included!!!

  8. amber says 10 May 2012 at 06:04

    Thanks for the follow-up article. Now that I begin to understand how “needs” are defined in this budget I feel I can give it another look.

  9. Rosa says 10 May 2012 at 06:14

    What a great article! I especially like how you compared the “radical” options and figured out which one didn’t seem that radical to you – instead of a list of rules about what is and isn’t important, you got to choose your own preferences.

    The great thing about the balanced money formula is how it makes you prioritize – maybe high-cost vegetables *are* a need for us, but then I have to cut something else to keep that number under $50.

  10. Brett says 10 May 2012 at 06:20

    I love the balanced money formula. I am returning to it after 6 months of a more detailed, categorized budget.

    I use Mint to keep track of things. I created 3 custom categories: Needs, Wants and Savings. I use my CC for 99% of my purchases. I go on once a week to classify recent purchases as needs or wants. I split purchases that fall into both. For example I may have purchased a case of soda with my groceries. That $5 purchase is split off and classified as a WANT.

    I find I am well under 50% for needs, but spot on 30% for wants. I try and put the leftover funds for Needs into Savings.

    • amber says 10 May 2012 at 09:46

      cool idea. I am addicted to tracking my expenses and splitting out categories on mint but I never realized I could create these as the actual categories. thanks.

  11. Panda says 10 May 2012 at 06:24

    I think the important thing with any budget system/guideline is to personalize it so it works for you. I set up a budget, but then check it against the Balanced Money Formula. For us, it wasn’t worth separating groceries into wants and needs. Groceries = needs, dining out = want. We’re comfortable with that. Car payment = need, Netflix subscription = want. We’ll reassess if/when our spending warrants it.

  12. Kraig @ Young, Cheap Living says 10 May 2012 at 06:44

    Well, first of all, I don’t really believe in following the balanced money formula. I think you should be free to cut your spending on wants and/or needs at any time you please to develop a formula that works well for your goals and life strategy. My spending on wants vs. needs is very different from your formula. Every dollar I spend fits into 50% of my income, for example. How much of it is needs vs. wants? Well, most of it is needs and a little of it is wants. My savings rate? It’s over 50%. It won’t be like that forever, but for now, it fits well with my goals.

    Now, as for what is hard for me to categorize? It’s definitely the cash I withdrawal from the ATM. I like to carry cash around and pay for anything less than $10-15 in cash so I don’t have a million transactions on my bank statement. I take out $100 at a time and track it in, however it’s not easy. When money is spent in cash, it’s hard to track it if you don’t write it down right away. This is my problem area and something I need to work on. As far as needs vs. wants, I don’t really track them in that way and have no need to.

    • Panda says 10 May 2012 at 07:51

      I think that’s the part that gets lost in most discussions of the Balanced Money Formula – it’s not a strict 50/30/20 rule.

      It’s really that they recommend you spend no more than 50% of your income on needs and save no less than 20%. There’s plenty of room to be not at 50/30/20 and still be in line with their guideline.

      Although, in the end, it’s still only one idea. No one is saying it’s for everyone. I just find it an interesting idea with which to “check” how I’ve already budgeted my money. If I was spending more than 50% on needs or saving less than 20%, I’d just ask myself “Am I comfortable that that’s right for me?”

  13. Christa says 10 May 2012 at 07:29

    I think food is still the most difficult to categorize as a want versus a need. Do I need bottled water? At first glance, no, but if I have it, I’m more apt to drink water rather than soda or lemonade. Compared to flavored drinks, the bottled water is healthier for me and therefore something I still actually consider a need. But I guess if I lump it into the need category and balance my budget accordingly, the system still works.

    • Slccom says 12 May 2012 at 16:56

      Is the kitchen faucet broken? There are a lot of ways to make bad-tasting water drinkable for a lot less money.

  14. Sam says 10 May 2012 at 08:02

    Enjoyed the discussion. We use a totally different system but interesting to hear what others do.

  15. EAP says 10 May 2012 at 08:13

    Maybe most people would find it easier to just focus on percentages to spend and save. Why parse every decision? At the end of the day, values inform whether or not something is a need or a want and our values are different from others’, and change as time passes. If I want to save more I can decide which thing(s) I spend money on are less valuable than whatever I gain by saving that money. Or if its more valuable to trade my time for more money.

  16. Krantcents says 10 May 2012 at 08:17

    This is agreat way to determine what you should buy. I want a new car, but I do not need one. My car is 17 years old and should be replaced before serious repairs begin to occur. To keep the car, I would have to replace the timing belt and a couple of other repairs. It is only worth roughly $2K. It is questionable to invest $800 more in it.

    • chacha1 says 10 May 2012 at 09:25

      I also have a 17-yr-old Accord which I bought used (for cash). I budget about $2000/yr for maintenance and repairs. That’s only $167/mo after all.

      That is a lot less money than a new-car payment (for an equivalent vehicle) would add up to, and buying another old car would kind of defeat the purpose. 🙂

      I’m holding out till I can pay cash for a 2-yr-old model of my choice. Till then I’ll keep driving the old one. Actually kind of hoping I can get it to 20 years.

    • El Nerdo says 10 May 2012 at 10:19

      According to the Car Talk guys, it’s always cheaper to repair. (However, having the car at the shop all the time misses the point of having a car.)

      • chacha1 says 10 May 2012 at 15:44

        Indeed. This is why “scheduled maintenance” on your vehicle is just as important as getting your own teeth cleaned. I take mine to the Midas that is within walking distance of our apartment, on Saturdays. They do what needs to be done, I walk back to pick it up.

        Not everyone has such a convenient setup but I got regular maintenance even when I *didn’t* have a shop down the street! And only once in my driving life have I had a car “break down” on me (burst radiator hose). AAA saved that day.

  17. Carla says 10 May 2012 at 08:28

    I love this post! There are certain things I have a hard time categorizing, like groceries. I will never trust the USDA, of all people, to tell me how much I should spend on food. Unless I have a piece of property and can grow most of my own food, raise chickens, etc, their amount isn’t enough for the way I need to eat. I do cut out a lot of non-essential extras, or save them for special occasions though and that helps a lot.

    I do like the bottled water example. I carry an empty container in my car for when I go out so I can fill it with water at a public fountain or cafe. If I’m stuck somewhere without it however, its either a choice between buying a bottle of water and getting a headache from mild dehydration. That comes out of my “coffee out” allowance.

    In terms of my gym membership, I’m thankful I got in at a good rate, but that’s still $XX spent monthly. I do use it more than the average membership holder in general, and never miss a beat. Some people may argue that, but I consider it part of my “non-insurance health plan”. My life and health has greatly improved since going to the gym 5 days a week for the past two and a half years. I do have physical limitations, including heat intolerance from a chronic illness so running outside in the summer is really not an option for me. Actually running is not an option. Not working out the way I can, even if it costs some money is definitely not an option. Its a “want” I’m not willing to give up.

  18. getagrip says 10 May 2012 at 08:30

    I’m sorry, but IMHO getting that nitpicky about “wants” and “needs” is just fooling yourself and looking for an excuse as to why even this simplified system is failing so you can blame the system rather than accept responsibility for yourself and your own decisions.

    You know when and how you’re BSing yourself, don’t blame the system. Even the author of the article recognized it. They are all wants. We just categorize “needs” as those wants we are really committed to. Accept the want, as long as you accept the consequences.

  19. ImJuniperNow says 10 May 2012 at 08:35

    This article comes at the best time! I am about to lose my housing (renting in an extended-family situation) and it’s not that I can’t afford to live much better than I am now, I’ll just have to suck it up and make different choices (i.e., no more maxing out the retirement account). I’m starting by not doing any food shopping until I have eaten everything I have in the freezer and pantry, so food “wants” go out the window and food “needs” must be satisfied with what’s on hand.

    Changing my “wants” and “needs” for this move will be challenging, but fun!

  20. Jefro says 10 May 2012 at 08:55

    Good article & subject.

    I found it difficult to believe in the $250/mo figure for food. Granted, my family and I live in rural coastal northern California, a very expensive area in general, and eat organic & local food as much as possible – but still, who eats on $250/mo? I could barely do that when I was single 17 years ago and living in a city.

    I found the most recent USDA food allotment chart*, and felt a little better. $250 is a rough rounding of the author’s situation. I would say at this point that we do overspend on food a bit, about 15% over the “liberal” category for our situation, but I classify that as a result of our life choices. Next time I’m in a city, I plan to do some comparison shopping to determine just how much more expensive it is to live here, and determine what is “paradise tax” and what is actual overspending.

    Tim, thanks for the push to classify & dig – it’s a good one.


    • chacha1 says 10 May 2012 at 09:34

      Love “paradise tax.” 🙂

      We live in L.A. and spend an average of $1000/mo for food for two adults. Could be a good bit less by cutting out our (fairly rare) dining out, or by DH packing his lunch, but we are willing & able to pay the extra for convenience.

      Kind of like living in town instead of commuting. About a third of that food budget is buying us time. I’m okay with that.

    • amber says 10 May 2012 at 09:43

      Yes I was wondering why he didn’t just link to the actual tables instead of providing a rough guess. If you use the June estimates, those are calculated for the entire year, not just the monthly data. These tables also do not/cannot account for restaurant eating.

    • El Nerdo says 10 May 2012 at 10:32

      The USDA figure is not meant to tell you how much to eat, it’s only to provide a baseline for basic food expenses. The BMF is not about extreme frugality or food-stamp eating.

      The theory is that in case of unemployment you cut back to that level, hence it’s categorization as “need”. If you were to lose your job tomorrow and start collecting unemployment, you’d have to cut restaurants, buy cheaper ingredients, skip on the wine, etc– that’s where those USDA figures will stretch to fit your “needs”. (And that’s the max you’d get if you were on food stamps aka SNAPP.)

      In normal times you are of course free to spend above and beyond that figure as you will, as long said expenses compete against books and shoes and trips and not, say, health insurance or savings or mortgage.

      • chacha1 says 10 May 2012 at 15:47

        I represent cutting back on shoes so I can buy more wine!

    • Heather says 13 May 2012 at 17:05

      I liked both of these sites for comparing cost of living, and specifically detailing the difference in housing & food. Maybe check that out if you want to see how that paradise tax impacts you.

  21. chacha1 says 10 May 2012 at 09:30

    The Balanced Money Formula is a good starting point for people who need to A) get their expenses well within their income and B) save. We don’t use it chez nous because I am married to a non-saver.

    Instead we negotiated an agreement to keep our household expenses (needs) within the scope of a single income. Either of us could pay what’s necessary each money. That means the other income – in our case, mine – can be used for paying down debt, “wants,” and savings.

    Because DH is self-employed he occasionally has a thin month, and I cover the rent at those times. We’ve used this system for going on four years and our financial health has improved *tremendously.*

    • K.C. says 10 May 2012 at 11:25

      My wife and I have also lived on the equivalent of one income when earning two. It allowed us to save a high percentage of our combined incomes and retire early. It also kept our basic living expenses low so we didn’t have to downsize at retirement.

      During our working lives, it gave us a lot of flexibility. It allowed my wife to return to college to finish her degree at age 32 without incurring debt. It allowed me to quit my job and start a small business without having to borrow money. It later allowed my wife to quit working for money for a number of years and care for an aging parent.

      The needs and wants are what we characterize as spending priorities. Since we have had no debt, including mortgage debt, since 1989, and keep other contractual obligations to a minimum, it is easy for us to cut back on low priority expenditures to deal with a decrease in income. In fact, our interest income has been in decline since 2008. We live by our spending priorities!

  22. El Nerdo says 10 May 2012 at 10:15

    @ Tim

    Netflix and other similar things might be a monthly charge but you can cut them without penalty. Hence they are a want & not a need. Just because you buy something monthly or it’s auto-billed it doesn’t mean you’re stuck in a contract. If you like it, just keep buying it, but it comes out of your wants budget.

    I do pay $20/month for FoxSoccer2go. It gives me access to a ton of games, which is a great bang for the buck. Why wouldn’t I want that want? It’s a ton of fun! If I make no money next month I simply cancel with no penalty– I’m not stuck with it for the next 2 years and I don’t have to choose between soccer or eviction.

    • Tim Sullivan says 10 May 2012 at 10:48

      I totally agree with you here and I think I could’ve worded that part better.

      I was documenting my initial categorizing of everything, meaning things were being transferred from “un-categorized” into “wants” and “needs” and not transferred between the two.

  23. Jen says 10 May 2012 at 10:25

    How do you categorize targeted savings accounts? Since I plan to spend the money on car repair, house down payment, insurance premiums, etc.– it isn’t really savings, is it?

    • Amanda says 10 May 2012 at 10:45

      I put my targeted insurance in needs and savings for the house in savings.

    • Matt says 10 May 2012 at 13:22

      Jen –

      Those still count as savings… that’s what savings is – money set aside for future expenses. They wouldn’t count as your emergency fund since they’re targeted elsewhere, but they would still count as part of the 20% goal.

    • Emily @ evolvingPF says 10 May 2012 at 16:45

      I use targeted savings as well. According to AYW, the 20% savings should break down as: 10% toward retirement, 5% toward accelerated mortgage payments, and 5% toward your long-term dreams. Depending on what your targeted savings are for, they could fall in any category. Our savings for car expenses is a “need,” savings for entertainment is a “want,” etc. Probably your house downpayment would be “savings” and the other categories you mentioned would be “needs.”

  24. Lance@MoneyLife&More says 10 May 2012 at 10:29

    Groceries would probably be the hardest thing for me. I hate going through my walmart receipts and dividing up household items from groceries etc for the budget type I use.

    • El Nerdo says 10 May 2012 at 10:36

      But that’s exactly what Warren/Tiyagi DON’T want you to do!

      Everyone keeps misreading what they mean and making straw-woman arguments.

    • Tim Sullivan says 10 May 2012 at 10:54

      I second El Nerdo here.

      I’m glad we get to have this discussion.

      It seems to me the point is to simply allocate funds to get everything in balance, then you have the allocated money spent only on those things.

      The book likes paying for things in cash. So let’s say you take out your weekly $150 or whatever in cash from your wants category.

      From there, let’s say you allocate $250 toward food each month (NEEDS). That’s 63 bucks a week. Put that cash in with your $150. When you go to the grocery store, pay cash. It’ll be divided up for you. If you spend more than your $63, then that food becomes wants, same rings true for eating out, happy hours, and all food related things.

      Sunday, you take your money out of the ATM. Spend it on whatever you’d like, but know that if it runs out before Saturday, you’re looking at a freezer-burnt dinner.

  25. Ryan says 10 May 2012 at 10:33

    Id like to hear more how people handle the cash situation? What’s an easy way to track and handle that? The misc cash transactions are what always throw off my budgeting and tracking efforts, so then I just say F it and drop off doing it for good.

    • Emily @ evolvingPF says 10 May 2012 at 16:52

      Can’t help much other than to say we use cash extremely rarely and when we do we immediately add the transaction to Mint, which is how we track. Do you have some lifestyle restraints requiring you to use cash? Could you temporarily switch to debit until you get the hang of tracking and budgeting?

    • Heather says 13 May 2012 at 17:15

      If your cash is relegated to spending on wants, the point is that you don’t have to track it.

      Every budget period, we put “incidentals” money into a separate debit card–for things like work clothes, new shoes, groceries, oh-shit-my-blood-sugar-is-crashing meals out on the town. Those, being on a debit card, get tracked. IF we can afford it, we also pull out cash for spending–dinner out, date nights, tattoos, music, booze, whatever. THAT money doesn’t get tracked. Cash withdrawal is categorized as “spending money” and whatever we spend it on is immaterial and completely without question. If I feel like spending my spending money on an extra credit card payment? That’s my choice. If it all goes onto a Starbucks card for coffee for the next month, that’s cool too. (It also affords us the ability to say “I’m taking you out to dinner” without it being a fight about whether *WE* can afford it–or we can go dutch if we want to make a bigger night of it.)

    • CB says 31 May 2012 at 12:08

      I handle cash by using it as little as possible and then only tracking the electronic component of cash (deposits & withdraws from an ATM machine). In the end it accounts for less than $100 of spending a month and I know that the vast majority of that spending is on wants so I apply it to that category.

  26. Marcella says 10 May 2012 at 11:08

    Nice article Tim. I agree with El Nerdo that needs should be pretty obvious. If you lost all future income tomorrow and had to drastically reduce all spending wherever possible, the things you don’t cut are needs and everything else is a want.

    For me, that’s my mortgage (I’d change to mimimum payments of interest only**, no principal repayments, that’s how it can work in Australia), my health insurance, very basic food, registration and insurance for my car and any necessary repairs (although I would consider delaying these and riding my bike), house insurance, medical costs, utilities and any recurring costs that it less to cancel than to keep paying (i.e. my iPhone which is $63/month would cost me a significant penalty to cancel the contract early).

    Everything else is a want: clothing, spending on eating out, gifts, holidays, pilates, internet at home.

    I really hope there is another follow up about classifying the savings part of the equation. That is where things get grey for me.

    If I am saving money for a future “want”, is that really savings? What about savings for future “needs”?

    My situation is that once I have spent on all my wants and needs, the remainder (currently 21%) is swept as “savings” into an account which offsets the principal of my mortgage. Say I have 100K in this account, approximately 40% of that is allocated to various sinking funds (emergency, house repair/renovation, holidays, furniture, car depreciation, other lumpy expenses like insurances which I am probably double counting since I have a sinking fund by also account for their monthly cost in my needs section). The other 60% is just sitting there and will probably be used to pay the mortgage down early. Is all this truly savings?

    Just to further complicate things, in Australia we have mandatory retirement savings of 9% of income (taxed at 15%). Our employers pay this into our retirement accounts and you never see it in your bank account. I actually start my income equation after this is taken out (i.e. assume total income of 109% – 9% goes to retirement, then I divvy up the 100% between wants/needs/savings.) Should I take this 9% back into the savings formula?

    ** As I went back and forth on the amount of mortgage payments I should include in the needs category, this made the formula really clear to me. I currently make payments to both the interest and principal portions of my mortgage. But paying down the mortgage isn’t a NEED, it’s a want. I need to pay the minimum, so the interest goes in the need part of the equation. Anything extra I might pay is a want.

    • Sara says 10 May 2012 at 21:07

      “If I am saving money for a future “want”, is that really savings? What about savings for future “needs”?”

      I think that saving for a future want is “saving,” and when you actually use that money to buy the want it’s a “want.”

  27. john says 10 May 2012 at 11:29

    Never worried about this, just always focused on savings first, once those goals were taken care of I paid all my fixed bills and the rest had to come out of what was left. I would tweak my spending accordingly to how much was left, if something had to be cut, I cut it, etc..

  28. Chris B. says 10 May 2012 at 11:32

    Love the article. I’m widowed w/2 boys ages 11 and 8. We were sitting at the Costco food court a couple of weeks ago, enjoying our $1.50 dog/soda for dinner and got into a long discussion about wants and needs, analyzing our carts, needs vs. wants, how to balance, prioritize, cut, etc.

    Happened to look up and there’s a family sitting right next to us avidly eavesdropping. Wish everyone started these types of lessons from childhood on, so many people wouldn’t have their iPhones, newish cars, DirecTV and be deeply in debt.

  29. Chase says 10 May 2012 at 13:45

    All that categorization is too much for me.

    As long as I’m making my 401k contribution (7% before the match) my Roth contribution 135$/ mo and my targeted savings acct contributions. Saving for a car, house computer, vacation, and emergency fund. If I’m doing all that, I just spend what’s left over cause business is all taken care of.

    But if I did, I think I’d classify need as if I got layed off today, what would I continue spending money on. Those must be needs.

  30. Jenn says 10 May 2012 at 14:21

    Your 50-30-20 percentages are spot on with a few exceptions. I think the most important thing is for people to first review what their current needs-wants-savings ratio is and make the necessary adjustments. Great post!

  31. Julie @ Freedom 48 says 10 May 2012 at 17:47

    Lucky for us, my husband and I aren’t big in the “want” department – we’re pretty darn content with living a simple life. As such… we do buy anything and everything we want – but we’re still able to invest/save 50% of our income. I’m happy with that.

  32. Sara says 10 May 2012 at 19:56

    As a disclaimer, I have not read Elizabeth Warren’s Balanced Money Formula book, BUT based on what I’ve seen in this article and Get Rich Slowly over the years, it concerns me that it’s all percentage based BECAUSE if you keep these percentages as you increase your income, then it CALLS FOR lifestyle inflation. That is, if I earn $40,000 post-tax, then I’m supposed to put $12,000 towards wants, but if I earn $100,000, that’s a whopping $30,000 to spend on wants, and it only goes up from there. Isn’t that what we’re supposed to avoid — unnecessary lifestyle inflation?

    • Emily @ evolvingPF says 11 May 2012 at 09:58

      I think of lifestyle inflation as having a mindless component. What the BMF does is give you permission to upgrade your lifestyle deliberately as your income increases while knowing that you are saving enough. That’s not “necessary” but hardly anything we spend money on is really necessary – hence this whole wants vs. needs discussion.

      That said, I think the BMF underestimates the amount of savings required for a sustainable life.

    • Rosa says 11 May 2012 at 17:54

      Their book says to CAP needs at 50% and wants at 30% and save AT LEAST 20%.

      not to always spend more if you make more.

  33. Matt at Healthy N' Wealthy says 10 May 2012 at 20:55

    Though sticking to a formula is ideal for some people, I simply try to “spend lavishly on things I love, and cut costs viciously on things I don’t love” (stole that from somewhere). If cutting cable, ditching the iPhone, getting a roommate, taking public transportation, and working extra shifts doesn’t put me below 30% in the “want” category, then I don’t want to stick to the formula.

    Also, I consider healthy food to be a need, the same way I consider medicine to be a need.

    • CB says 31 May 2012 at 12:04

      I’m pretty sure that’s Ramit Sheti (spelling) from I Will Tech You to be Rich.

  34. Financial Advice for Young Professionals says 10 May 2012 at 21:00

    People always ask me how do you know if you’re saving enough? And I tell them that it should hurt a little bit. You have to make sacrifices, albeit little ones so that you will benefit later on in life 🙂

  35. Financial Advice for Young Professionals says 10 May 2012 at 21:04

    People always ask me how do you know if you’re saving enough? And I tell them that it should hurt a little bit. You have to make sacrifices, albeit little ones so that you will benefit later on in life 🙂

    Good stuff, thanks for the article

  36. Robert says 13 May 2012 at 12:55

    “Make all you can,save all you can,give all you can”- John Wesley.

  37. Andrew Mac says 18 May 2012 at 09:04

    Can we dissect what counts as savings? I’m willing to bet it includes any money I put into retirement, but does it include my saving up money for my emergency fund, a house downpayment, and a vacation?

    I think it’s pretty agreeable that we all need vacations in some shape or form, but if I decide to save up for a cruise rather than camping at my local state park, does that qualify now as a want or savings?

    Is the term savings tied to how soon the person will turn around and save it? If I save up for a year for aforementioned cruise, is that different than decades of retirement planning?

    • CB says 31 May 2012 at 12:03

      In my opinion planned spending (aka, saving up for a vacation) is not savings.

    • A-L says 04 January 2013 at 07:22

      I’ve debated about this myself. In the end, I’ve decided that it depends on what the targeted savings is for.

      If it’s for a need (saving to replace a car) then I categorize it as a need.

      If it’s for a want (vacation, home improvement…not to be confused with home maintenance) then I categorize it as a want.

      I consider savings to be retirement, emergency fund, general savings (sort as a buffer if you need a new appliance or to pay for insurance deductibles), mortgage prepayments, freedom funds, etc. Basically savings is money put aside for a rainy day and/or a no longer earning money day.

  38. CB says 31 May 2012 at 12:01

    In response to catherine’s comment in the article:

    To me, what fits into wants vs. needs is determined by the nature of the expense, not whether you’ve made a higher or lower end choice within that category.

    For example, what you spend on shelter fit into the need category regardless of if you choose to pay for a 5000 sq foot house or a tiny studio apartment.

    After the category, you then look at the PERCENTAGE of income that the category is consuming. So when you look at your needs category and see that you’re spending 70% of your income on items in that group you THEN need to look at the cost of each individual item and decide where to cut down. Maybe you decide to shop at the Grocery Outlet rather than Whole Foods, or sell your house and rent an inexpensive apartment. But this doesn’t change the fact that groceries and shelter and medical expenses are needs, while books and nights at the bar are wants.

    The point of the balanced money formula is to keep it simple, you shouldn’t have to drive yourself crazy splitting the cost of one item into multiple categories.

  39. Michael says 06 September 2012 at 05:24

    My strategy is, regardless of how the percentages work out, to make sure that ALL your “wants” money is discretionary. Get rid of monthly payments for things like NetFlix, because as soon as you have to pay for something it automatically becomes less fun!

    I also find that you can convert needs to wants without spending extra – pick a favourite meal that you only make when the main ingredients are on sale at the store, get creative with home-made decorations instead of splashing on that $50 ornament, or buy an old example of the car you really want instead of a newer but less exciting model.

Leave a reply

Your email address will not be published. Required fields are marked*