Necessities

What Are Necessities?

In personal finance and Household Budgeting, necessities refer to essential goods and services required for basic survival and maintaining a reasonable standard of living. These are expenditures that individuals and households cannot reasonably do without, such as housing, food, utilities, basic transportation, and healthcare. The concept of necessities is fundamental to Financial Planning as it forms the baseline for understanding a household's irreducible expenses. While the precise definition of what constitutes a necessity can vary based on societal norms, geographic location, and individual circumstances, the core idea remains focused on items indispensable for daily life.

History and Origin

The distinction between necessities and other forms of consumption has long been a subject of economic and social discourse. Early economic thought, such as that of Adam Smith, implicitly recognized essential goods needed for the sustenance of labor. Over time, as economies developed and living standards evolved, the basket of goods and services considered "necessary" has expanded beyond mere subsistence. For instance, what was once a luxury, like electricity or indoor plumbing, has become a widely accepted necessity in developed nations.

Governmental bodies and international organizations often define what constitutes basic needs for statistical and policy purposes. For example, the U.S. Census Bureau develops Poverty Thresholds which are dollar amounts used to determine poverty status, reflecting the income needed to meet minimal food and other basic needs.¹³, ¹⁴, ¹⁵ Similarly, organizations like the International Monetary Fund (IMF) discuss basic needs in the context of economic development and poverty reduction strategies, recognizing that access to fundamental goods and services is crucial for societal well-being.¹⁰, ¹¹, ¹² Historically, the rising Cost of Living in the United States, particularly for basic items, has been a recurring theme, reflecting the dynamic nature of what is deemed essential.⁹

Key Takeaways

• Necessities are essential goods and services required for basic survival and a reasonable standard of living.
• Common examples include housing, food, utilities, basic transportation, and healthcare.
• They form the foundation of a Budgeting plan and are considered Fixed Expenses or essential Variable Expenses.
• Understanding necessities is crucial for achieving Financial Security and building an Emergency Fund.

Interpreting Necessities

Interpreting necessities involves understanding which expenses are truly unavoidable and which can be adjusted or eliminated. For an individual or household, expenses like rent or mortgage payments, basic groceries, and utility bills (e.g., electricity, water) are generally considered necessities. The precise categorization can sometimes be subjective; for example, basic internet access might be a necessity in today's digital economy for work or education, while premium cable television would not.

Properly identifying necessities helps in effective financial management by distinguishing between unavoidable costs and those that offer flexibility. This distinction is vital when managing Debt or when facing an Economic Downturn and needing to reduce spending.

Hypothetical Example

Consider Sarah, a recent college graduate managing her finances. Her monthly expenses include:

• Rent: $1,200
• Groceries: $400
• Utilities (electricity, water, internet): $150
• Student loan payment: $300
• Car insurance: $100
• Gas for commuting: $80
• Eating out: $250
• Entertainment: $200
• Gym membership: $50

To determine her necessities, Sarah would categorize her expenses:

• Necessities: Rent ($1,200), Groceries ($400), Utilities ($150), Student loan payment ($300), Car insurance ($100), Gas ($80). Total Necessities = $2,230.
• Non-Necessities (Discretionary Spending): Eating out ($250), Entertainment ($200), Gym membership ($50). Total Non-Necessities = $500.

In this example, Sarah's total necessities are $2,230, which represents the minimum amount she must spend each month to cover her basic living costs and essential obligations. Understanding this allows her to see her Disposable Income and prioritize Savings.

Practical Applications

Necessities play a critical role in various aspects of personal finance and economic analysis.

1. Personal Budgeting: Identifying necessities is the first step in creating a budget, ensuring that essential expenses are covered before allocating funds to other areas. This is where the 50/30/20 rule (50% for necessities, 30% for wants, 20% for savings and debt repayment) often applies.
2. Economic Measurement: Statistical agencies, such as the U.S. Bureau of Labor Statistics (BLS), conduct surveys like the Consumer Expenditure Survey to track how consumers spend their money, including on necessities. This data helps calculate the Consumer Price Index (CPI), a key measure of Inflation.⁴, ⁵, ⁶, ⁷, ⁸
3. Poverty Measurement: Governments and non-profits use the cost of necessities to define poverty lines and determine eligibility for social welfare programs. The U.S. Census Bureau's poverty thresholds are an example of this, establishing the minimum Personal Income considered necessary to meet basic needs.¹, ², ³
4. Financial Hardship Analysis: In times of economic stress, understanding the burden of necessities helps policymakers assess household vulnerability and design relief measures. Changes in the cost of necessities are closely watched as Economic Indicators.

Limitations and Criticisms

Defining and categorizing necessities can present challenges. What is considered a necessity can be highly subjective and evolve over time with technological advancements and changing societal expectations. For example, a smartphone might be considered a necessity for many in the modern workforce for communication and access to information, even if it wasn't decades ago.

Furthermore, the cost of necessities can vary significantly by geographic region, making a universal definition difficult. Cost of Living adjustments are often necessary to account for these regional differences. While government agencies strive to create objective measures, any fixed "basket" of necessities might not fully capture the diverse needs and living situations of all individuals. Critiques often point to the inadequacy of static poverty measures that do not fully account for rising healthcare costs, childcare expenses, or the cost of modern connectivity, which are increasingly seen as essential for participation in society.

Necessities vs. Discretionary Spending

The primary distinction between necessities and Discretionary Spending lies in their essentiality.

While necessities cover the fundamental requirements for living, discretionary spending accounts for expenses that improve quality of life but are not strictly required. The ability to distinguish between these two categories is central to effective personal finance management.

FAQs

What are the core categories of necessities?

The core categories of necessities typically include housing (rent or mortgage, property taxes), food (groceries for home cooking), utilities (electricity, water, heat, basic internet), essential transportation (public transit, gas for a car to commute), and basic healthcare expenses (insurance premiums, essential medical care).

How do necessities impact my budget?

Necessities form the foundation of your budget. They represent the minimum amount of money you must spend each month to cover your basic living costs. By understanding these Fixed Expenses and necessary Variable Expenses, you can allocate your remaining Personal Income towards savings, debt repayment, and discretionary spending.

Can necessities change over time or vary by location?

Yes, what is considered a necessity can change significantly over time due to societal evolution and technological advancements. For instance, internet access, once a luxury, is now often seen as essential for work, education, and communication. Necessities also vary by location due to differences in Cost of Living, climate, and available infrastructure (e.g., car ownership might be a necessity in rural areas but not in cities with robust public transport).