How do I differentiate between needs and wants when putting together my budget?

AI's response in regular print | Beverly Hills, CFP®, Joe O'Boyle's in italics

“How do I differentiate between NEEDS and WANTS when putting together my budget and financial plan?”

Depending on your financial situation, some people find the 50-30-20 budgeting guideline to be a helpful framework. The basic idea is to divide your budget into 3 categories based on your after-tax income. You would then spend 50% of your after-tax income on your needs, 30% of your after-tax income on your wants and 20% on saving and investing for the future.

When putting together your budget and financial plan, it's crucial to differentiate between needs and wants to allocate your resources effectively. Here are some steps to help you with this process:

1. Start with the Essentials: Begin by identifying your essential needs—those expenses necessary for your basic survival and well-being. This typically includes housing, utilities, food, clothing, transportation, healthcare, and debt payments. These are the non-negotiable expenses that should be prioritized in your budget.
   

2. Evaluate Discretionary Expenses: Discretionary expenses are wants that provide enjoyment or convenience but are not essential for your basic needs. This category can include entertainment, dining out, vacations, hobbies, and luxury items. Evaluate each discretionary expense carefully and consider its importance and impact on your overall financial well-being.
   
   Consider the long-term impact of your choices. Needs typically have long-term benefits that contribute to your overall well-being and sustainability. Wants, on the other hand, often provide immediate gratification but may not have significant long-term value. When faced with a want, practice delayed gratification. Give yourself time to think it over and evaluate if it aligns with your goals and priorities. Delaying the purchase allows you to assess its true importance and determine if it is a fleeting desire or something worth pursuing.
   

3. Consider the Purpose and Value: Assess the purpose and value of each expense. Needs often serve a functional purpose and are directly related to your well-being or livelihood. Wants, on the other hand, may provide enjoyment or convenience but are not essential for your survival or long-term goals. Ask yourself if the expense aligns with your values and if it contributes significantly to your overall well-being.
   
   Evaluate the functional purpose of an item or service. Ask yourself if it is necessary to fulfill a specific need or if it simply enhances convenience or pleasure. For example, a smartphone may be essential for communication and work-related tasks, but an expensive luxury phone may be a want rather than a need.
   

4. Prioritize and Allocate Resources: Once you have identified your needs and evaluated your wants, allocate your financial resources accordingly. Give priority to fulfilling your needs first and ensuring that you have enough resources to cover them. Then, allocate remaining funds to address your wants, considering their importance and the level of satisfaction they bring to your life.
   
   Consider your financial situation and resources. If fulfilling a want would strain your budget or prevent you from meeting your needs, it is likely a want that can be deferred or reconsidered.
   

5. Set Limits and Boundaries: Establish limits and boundaries for your discretionary spending. Determine a reasonable portion of your income that can be allocated towards wants without compromising your financial stability or ability to meet your needs. Setting spending limits helps you make conscious choices and avoid overspending on unnecessary items.
   
   Assess the urgency and timing of your desired item or service. Needs are often time-sensitive and require immediate attention, such as paying bills or addressing health concerns. Wants, however, can often be delayed or postponed without significant consequences. This evaluation helps you prioritize your spending.
   

6. Regularly Review and Adjust: Regularly review and reassess your budget and financial plan. As your circumstances change, your needs and wants may also evolve. Continually evaluate your spending patterns, reassess your priorities, and make adjustments to ensure your budget aligns with your current financial goals and situation.
   
   Reflect on your personal values and what truly matters to you. Align your spending decisions with your values and priorities. This self-reflection helps you differentiate between wants that may be influenced by external factors and needs that are aligned with your core values and well-being.

Remember, the goal is to strike a balance between fulfilling your essential needs and enjoying your wants without jeopardizing your financial well-being. Differentiating between needs and wants in your budgeting process allows you to make informed decisions, prioritize effectively, and align your financial resources with your overall goals and priorities.

“How does Maslow's Hierarchy of Needs factor in?”

Maslow's Hierarchy of Needs provides a useful framework for understanding the relationship between needs and wants. According to Maslow's theory, human needs are organized into a hierarchical structure, with basic physiological and safety needs at the lower levels, and higher-level needs such as belongingness, esteem, and self-actualization at the top.

In the context of differentiating between needs and wants, Maslow's Hierarchy of Needs can help guide the prioritization of needs over wants. The lower-level needs, which include physiological needs like food, water, shelter, and safety needs like security and stability, are considered fundamental and necessary for survival and well-being. These needs take precedence over wants and should be addressed as priorities.

Once the lower-level needs are fulfilled, individuals can move up the hierarchy to higher-level needs, such as social connections, self-esteem, and self-actualization. Higher-level needs are often more subjective and can involve wants that contribute to personal growth, fulfillment, and self-expression.

Applying Maslow's Hierarchy of Needs in differentiating between needs and wants involves considering the following:

1. Focus on Lower-Level Needs: Prioritize fulfilling basic physiological and safety needs before allocating resources towards wants. These needs form the foundation for well-being and should be addressed first.

2. Consider Contextual Needs: Different situations and life stages can influence the prioritization of needs and wants. For example, the needs of a young adult starting their career may differ from those of a retiree. Consider the specific context and life circumstances in determining the importance of needs versus wants.

3. Individual Variations: Maslow's Hierarchy of Needs recognizes that individuals may have different needs hierarchies and priorities. Personal values, cultural influences, and individual circumstances can shape the relative importance of needs and wants for each person. It is important to consider these individual variations when applying the hierarchy.

While Maslow's Hierarchy of Needs provides a helpful framework, it's worth noting that the line between needs and wants can be subjective and can vary among individuals. What may be considered a need for one person may be seen as a want for another. The hierarchy serves as a guide to prioritize fulfilling essential needs before addressing wants, but personal judgment and reflection are also important in determining one's own needs and wants.

What did you think? How did AI do?

About OpenAI’s ChatGPT tool:
GPT (short for "Generative Pre-training Transformer") is a type of language model developed by OpenAI that is trained to generate human-like text. ChatGPT is specifically designed for generating text in a conversational style. It is a machine learning model and has been trained on large datasets of real-world conversations in order to learn the patterns and styles of human communication.

Joe O'Boyle is the founder and principal of O'Boyle Wealth Management, a full service financial planning and investment management firm, located in Beverly Hills, California. Joe O’Boyle was named to InvestmentNews 40 under 40 class of 2016, and has a catalog of financial planning and investing articles on Money.com & U.S. News. Disclosure information.