What Is Needs, Wants, and Financial Goals?
"Needs, wants, and financial goals" refers to a foundational concept within personal finance and financial planning that categorizes how individuals allocate their resources. Needs are essential expenses required for survival, such as housing, food, and utilities. Wants are desires that improve quality of life but are not strictly necessary, such as entertainment or luxury goods. Financial goals are specific objectives that individuals aim to achieve through their financial resources, encompassing both short-term aims like building an emergency fund and long-term aspirations like retirement planning. This framework is a core component of behavioral finance, guiding individuals in making informed decisions about spending and saving.
History and Origin
The distinction between needs and wants has roots in economic thought, going back centuries to discussions on utility and human behavior. However, the explicit integration of "financial goals" into this framework as a cornerstone of personal financial management gained prominence with the rise of modern financial planning in the mid-20th century. As economies grew more complex and individuals gained more control over their financial destinies, the need for structured approaches to managing income and expenses became evident. The concept of setting and working towards financial goals became central to guiding individuals through various life stages, from early career development to wealth accumulation and eventual wealth distribution. Governmental and educational initiatives, such as those by the U.S. Department of the Treasury's Financial Literacy and Education Commission, have further emphasized the importance of financial literacy, which includes understanding needs, wants, and financial goals, for the well-being of Americans.6,,5,4
Key Takeaways
- Needs are essentials for survival and basic living, such as housing, food, and healthcare.
- Wants are desires that enhance quality of life but are not fundamental for existence.
- Financial goals are specific, measurable objectives established to guide financial decisions, ranging from short-term to long-term.
- Prioritizing needs, wants, and financial goals is crucial for effective budgeting and achieving financial security.
- This framework helps individuals make conscious choices about their cash flow and resource allocation.
Interpreting Needs, Wants, and Financial Goals
Understanding needs, wants, and financial goals involves a realistic assessment of an individual's financial situation and aspirations. Needs represent non-negotiable expenses that must be covered to maintain a basic standard of living. These are often fixed or semi-fixed costs that are difficult to reduce significantly without impacting well-being. Wants, on the other hand, offer flexibility; they are areas where discretionary spending can be adjusted based on income, current financial goals, and unexpected expenses. Financial goals provide the motivation and direction for managing both needs and wants. For instance, a long-term goal like saving for a down payment on a home might lead an individual to reduce spending on wants to allocate more funds towards that objective. This continuous evaluation and adjustment between needs, wants, and financial goals is dynamic and adapts as life circumstances and economic conditions evolve.
Hypothetical Example
Consider Sarah, a recent college graduate with a monthly take-home income of $3,500.
Needs:
- Rent: $1,200
- Groceries: $400
- Utilities: $150
- Transportation: $100 (public transit pass)
- Health Insurance: $150
Total Needs: $2,000
Wants:
- Dining out/Takeaway: $300
- Entertainment (streaming services, movies): $100
- New clothes: $100
- Gym membership: $50
Total Wants: $550
Financial Goals:
Sarah's primary financial goal is to build an emergency fund of $6,000 within a year and then start saving for a master's degree.
Application:
Sarah allocates $2,000 for her needs. From her remaining $1,500, she dedicates $550 to her wants. This leaves her with $950 ($3,500 - $2,000 - $550) per month to put towards her financial goals. Over 12 months, this would allow her to save $11,400, comfortably exceeding her initial emergency fund goal and giving her a substantial start on her master's degree savings. If she found herself short, she could review her "wants" column and decide to reduce dining out or entertainment to accelerate her progress towards her savings goals.
Practical Applications
The framework of needs, wants, and financial goals is fundamental to various aspects of personal financial management. In budgeting, it helps individuals categorize expenses and identify areas for potential savings. For instance, using a 50/30/20 rule, where 50% of income goes to needs, 30% to wants, and 20% to savings and debt repayment, is a common application. This structure aids in disciplined resource allocation.
In the realm of investment planning, these categories guide decisions about asset allocation and risk tolerance. For example, funds allocated to immediate needs might be kept in highly liquid, low-risk accounts, while money earmarked for long-term financial goals, such as accumulating retirement savings, might be invested in a diversified portfolio with a higher risk tolerance. Furthermore, the concept is crucial in estate planning, where individuals ensure their assets align with their long-term wishes and the needs of their beneficiaries. A 2022 survey indicated that many Americans find reaching financial goals, such as buying a home or saving for retirement, challenging due to economic factors like inflation and rising interest rates.3
Limitations and Criticisms
While the needs, wants, and financial goals framework is a powerful tool for financial organization, it has certain limitations. The primary criticism often revolves around the subjective nature of what constitutes a "need" versus a "want." What one individual considers a need (e.g., a car for commuting in an area with poor public transport) another might consider a want (e.g., in a city with extensive public transit). This subjectivity can lead to self-deception or an inability to make difficult spending cuts.
Another challenge lies in the dynamic nature of both individual circumstances and the economy. Life events such as job loss, unexpected medical expenses, or family changes can blur the lines between needs and wants and derail financial goals. External factors like inflation, economic downturns, or changes in interest rates can also significantly impact purchasing power and the feasibility of achieving long-term objectives. The behavioral aspect of financial decision-making, where individuals may struggle with delayed gratification or succumb to immediate desires, also presents a hurdle. While "nudges" and behavioral economics interventions can help promote financially healthy behaviors like saving, financial literacy alone does not always translate into better financial outcomes.2,1
Needs, Wants, and Financial Goals vs. Budgeting
While closely related, "needs, wants, and financial goals" and "budgeting" are distinct concepts within personal finance.
| Feature | Needs, Wants, and Financial Goals | Budgeting |
|---|---|---|
| Primary Focus | Categorization and prioritization of expenses and aspirations. | Detailed plan for managing income and expenses over a set period. |
| Nature | Conceptual framework for understanding financial priorities. | Practical, quantitative tool for tracking and controlling money flow. |
| Output | A clear understanding of what resources are essential, desired, and targeted for future objectives. | A structured overview of income, expenses, and allocations for savings/goals. |
| Relationship | Provides the inputs and direction for a budget. | Is the mechanism by which needs, wants, and financial goals are realized. |
| Key Question Asked | "What do I truly need, what do I desire, and what am I aiming for financially?" | "How will I allocate my income to cover my expenses and achieve my goals?" |
The "needs, wants, and financial goals" framework provides the strategic foundation, outlining what an individual hopes to achieve and how their spending aligns with those aims. Budgeting, conversely, is the tactical process of creating a detailed plan to put that strategy into action, tracking every dollar to ensure alignment with the defined needs, wants, and financial goals. A budget helps ensure that necessary expenses are covered, discretionary spending is kept in check, and sufficient funds are directed towards achieving specific financial objectives.
FAQs
What's the difference between a need and a want?
A need is something essential for survival or basic well-being, like food, shelter, and basic utilities. A want is something that improves your quality of life but isn't strictly necessary, such as dining out, entertainment, or a new gadget.
Why is it important to distinguish between needs and wants?
Distinguishing between needs and wants helps you prioritize your spending, especially when resources are limited. It allows you to ensure essential expenses are covered first, before allocating funds to discretionary items, which is crucial for maintaining financial stability and working towards financial goals.
How do financial goals fit into this?
Financial goals are specific objectives that you aim to achieve, like saving for a down payment on a home, building an emergency fund, or planning for retirement. Once needs are met, you can adjust spending on wants to free up more money to put towards your financial goals. This prioritization helps you make progress toward long-term aspirations.
Can a want become a need?
In some specific situations, a want can become perceived as a need due to circumstances or convenience. For example, owning a car might be a want in a city with robust public transportation but becomes a practical need in an area where public transit is unavailable and a car is essential for commuting to work or accessing basic services. However, it's important to differentiate true necessities from conveniences when planning your financial future.
How often should I review my needs, wants, and financial goals?
It is beneficial to review your needs, wants, and financial goals regularly, such as quarterly or annually, or whenever a significant life event occurs (e.g., a new job, marriage, or birth of a child). This allows you to adapt your financial plan to changing circumstances and ensure you remain on track to achieve your objectives. Consistent review is part of robust financial literacy.