Necessity

What Is Necessity?

In finance and economics, a necessity refers to a good or service that is essential for survival or a basic standard of living. These items are generally considered indispensable, meaning individuals and households must acquire them regardless of price fluctuations or economic conditions. The concept of necessity is central to personal finance, budgeting, and consumer economics, as it dictates the most fundamental allocations of income.

Necessities typically include items such as food, shelter, clothing, and basic healthcare. While the absolute definition of what constitutes a necessity can vary based on cultural context, geographical location, and societal norms, the core idea revolves around meeting fundamental human needs. Understanding necessities helps individuals prioritize expenditures and build a resilient household budget.

History and Origin

The concept of economic necessities has been a subject of discussion among economists for centuries. Early economic thinkers like Adam Smith, in his seminal work "The Wealth of Nations" (1776), distinguished between "necessaries and conveniences of life." Smith observed that what constitutes a necessity can evolve with societal advancement. For instance, while a linen shirt might not be strictly necessary for survival in a physiological sense, it became a social necessity for a laborer in civilized society to avoid appearing indecent, demonstrating how social norms influence economic definitions.¹⁰, ¹¹

In the 20th century, the "basic needs approach" gained prominence, particularly in development economics. Organizations such as the International Labour Organization (ILO) and the United Nations (UN) have championed frameworks defining a set of minimum resources required for long-term physical well-being. This approach, emphasized at the World Employment Conference in 1976, often includes not just food, water, clothing, and shelter, but also sanitation, education, and healthcare, reflecting a broader view of what enables a dignified existence.⁸, ⁹

Key Takeaways

• Necessities are goods and services essential for survival and maintaining a basic standard of living.
• They are typically inelastic in demand, meaning consumption changes little despite price shifts.
• Common examples include food, housing, basic clothing, and fundamental healthcare.
• The definition of a necessity can evolve over time and vary by societal context.
• Prioritizing necessities is a cornerstone of sound financial planning.

Interpreting Necessity

Interpreting necessity in a financial context involves distinguishing between essential outlays and optional ones. For individuals, understanding what truly falls under the umbrella of necessity is crucial for effective money management. This often means evaluating expenses to determine if they are required to maintain health, safety, and employment. For example, rent or mortgage payments, utility bills, and basic groceries are clear necessities. Transportation costs to get to work could also be considered a necessity for many.

The determination of a necessity is not always static; it can be influenced by external factors like rising inflation, which can make once-affordable necessities suddenly expensive, or by personal circumstances such as health issues requiring specific medical supplies. Economic data, such as the Bureau of Labor Statistics' Consumer Expenditure Surveys, provide insights into how average households allocate spending across various categories, including necessities.⁷

Hypothetical Example

Consider Maria, a recent college graduate managing her first independent budget. She earns a net income of $3,000 per month.

Maria's monthly expenses are:

• Rent: $1,200
• Utilities (electricity, water, internet): $150
• Groceries: $400
• Health Insurance: $100
• Public Transportation Pass: $75
• Student Loan Payment: $250
• Dining Out: $200
• Entertainment: $150
• New Clothes: $100

To identify her necessities, Maria reviews each item:

1. Rent, Utilities, Groceries, Health Insurance, Public Transportation: These are all essential for her survival, well-being, and ability to commute to work. Total: $1,200 + $150 + $400 + $100 + $75 = $1,925.
2. Student Loan Payment: While a debt, it is a contractual obligation and essential to avoid severe negative financial consequences, thus generally treated as a necessity within a budget.
3. Dining Out, Entertainment, New Clothes: These are clearly optional.

Maria's total monthly necessities sum to $1,925 (living costs) + $250 (student loan) = $2,175. This exercise helps her prioritize her spending, ensuring her essential needs are covered before allocating funds to non-essential categories or savings.

Practical Applications

The concept of necessity has several practical applications in personal finance, public policy, and economic analysis:

• Budgeting and Financial Planning: Individuals and households use the distinction between necessities and non-necessities to create effective budgets. Prioritizing payments for essential goods and services helps build financial security and ensures core needs are met, especially during economic downturns or unexpected events. This forms the basis for establishing an emergency fund.
• Poverty Measurement: Governments and non-governmental organizations define poverty lines based on the cost of meeting basic necessities. For example, the U.S. Bureau of Labor Statistics' Consumer Expenditure Surveys provide data crucial for understanding household spending patterns on various goods and services, including those deemed necessary for a basic standard of living.⁵, ⁶
• Inflation Analysis: Economists track the prices of necessities closely because increases in these areas disproportionately affect lower-income households. When the cost of essential goods like food and energy rises rapidly, it can severely strain household budgets. Research from the Federal Reserve Bank of Dallas highlights that low-income households spend a larger percentage of their income on necessities, making them more vulnerable to price shocks.⁴
• Public Policy and Social Welfare: Understanding necessities informs social welfare programs, housing assistance, food aid, and unemployment benefits, aiming to provide a safety net that ensures citizens can afford fundamental goods and services.

Limitations and Criticisms

While the concept of necessity is fundamental, it faces certain limitations and criticisms:

• Subjectivity: What is considered a necessity can be highly subjective and vary significantly across individuals, cultures, and economic strata. For someone living in a rural area, a personal vehicle might be a necessity for employment, whereas in a major city with robust public transport, it may not be. This fluidity makes a universal, objective definition challenging.
• "Necessities Creep": As societies develop and living standards rise, items once considered luxuries can become perceived as necessities. For example, internet access, once a convenience, is increasingly viewed as a necessity for education, employment, and communication in many modern economies. This "creep" can make it harder for individuals and policymakers to draw clear lines.
• Income Elasticity Paradox: Economic theory often defines necessities as goods with an income elasticity of demand between zero and one (i.e., demand increases with income, but at a slower rate). However, for very low-income households, even basic food items might have a negative income elasticity (Giffen goods), meaning they consume more of these inferior goods as income falls, blurring the lines of what constitutes a "normal" necessity.
• Impact of Inflation: While necessities are essential, their rising costs due to inflation can erode purchasing power, especially for those with fixed expenses and limited financial flexibility. The impact is often more severe for lower-income households who dedicate a greater proportion of their income to these essential items.³

Necessity vs. Discretionary Spending

The distinction between necessity and discretionary spending is a cornerstone of sound personal finance and budgeting.

Confusion often arises because what is discretionary for one person might be considered a necessity for another due to differing life circumstances, health needs, or work requirements. For example, a high-speed internet connection might be discretionary for a retiree but a necessity for someone who works remotely. The core difference lies in the fundamental requirement for survival and basic function versus optional enjoyment or convenience.

FAQs

What are common examples of necessities?

Common examples of necessities include shelter (rent or mortgage payments), food (groceries for home cooking), basic utilities (water, electricity, heating), essential clothing, and fundamental healthcare expenses.²

How does inflation affect necessities?

Inflation can significantly increase the cost of necessities, making them less affordable for households, particularly those with lower incomes. When prices for essential goods and services rise, people's purchasing power diminishes, forcing them to allocate a larger portion of their budget to meet basic needs and potentially cut back on other areas.

Can a luxury become a necessity?

Yes, items once considered luxuries can evolve into necessities as technology advances and societal norms shift. For instance, while a personal computer or internet access might have been a luxury decades ago, they are now often considered essential for education, employment, and communication in many parts of the world.¹

Why is distinguishing between necessities and wants important for financial health?

Distinguishing between necessities and wants is crucial for effective financial management. It enables individuals to prioritize spending, ensure that fundamental needs are met before indulging in non-essential items, and allocate funds more effectively towards financial goals like building an emergency fund or reducing consumer debt.