Groceries, gas expenses and clothing vary, too.ĭiscretionary spending reflects your “wants.” They are more lifestyle-driven and include all the things you choose because they bring you some satisfaction. It is variable if it fluctuates, as your electric bill will depending on how much It is fixed if you pay the same amount each time, such as your monthly rent or annual insurance premium. Health care and other types of insurance coverageĮssential spending can be fixed or variable.
Taxes, which the authorities will require you to pay This spending includes:Įveryday living expenses such as rent, groceries and utilities (including phones)įinancial commitments you’ve made, such as mortgages, credit card debt and car loans You need to have these things, and you need to pay for them. Saving successfully for retirement becomes extremely challenging.Įssential spending – what was referred to as a “need” – is mandatory spending that you have no choice over. They are fundamental to the budgeting process and to making responsible spending decisions. In the world of personal finance, those terms – needs and wants – are called essential spending and discretionary spending. Others, whether out of not knowing or the inability to resist peer pressure to keep up with others, may have continued to struggle, never differentiating between needs and wants and never Intuitively, using a hit-or-miss approach, you finally got it. But very rarely did the message get broken down to the simple concept of needs and wants, which would have made the idea of budgeting much easier to understand and adopt.
You may have muddled through this balancing act until you got your months to close. For the first time, being out of balance had a real-life implication: either credit card debt or the inability to close It wasn’t until you were living on your own that you discovered the consequences of not balancing the inflow of funds with the outflow. But all too often – maybeīecause of the taboos around the topic of money – they may not have shared the most fundamental lesson of financial literacy: balancing a budget. They typically gave you what you needed, but not necessarily what you wanted. Unless you came from extreme wealth, sometime between then and young adulthood, your parents introduced you to the difference between need and want. You learned you had choices, and the world was filled with endless temptation. But by your Terrible Twos, you discovered wants. The challenge of deciphering needs and wants has followed you throughout your life.Īt birth, you functioned from a place of survival, with needs that your parents met. Here we see how the concept evolves over your lifetime to help ensure a happy retirement. Yet, the concept is not part of financial literacy training at home or in schools. Without that, it becomes hard to control impulse spending and even harder to save successfully for retirement. Understanding essential versus discretionary spending – or “needs” versus “wants” – forms the basis for sound financial decision-making.
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