Needs vs. wants: The difference between essential and discretionary spends, and why it matters

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Have you ever drawn up a budget and taken a look at your expenses, only to realize that some of them seemed quite frivolous or indulgent? Perhaps you picked out some spends and admitted to yourself that you could have done without them? Like that cab ride you took even though there was enough time to take the bus to the office? Or that pizza you tried at a local cafe on an impulse, even though you weren’t hungry?

Looking at a budget can also lead to another train of thought. Like when you check out your EMI payments or your child’s school fees and wish they were not so steep, because you would have to pay them no matter what.

Well, what you’re essentially doing here is subconsciously comparing your needs and your wants. Or, in other words, your essential and discretionary expenses. What are they? How do they differ? And why is it important to know the difference?

Come, let’s find out.

What are essential expenses?

Essential expenses or non-discretionary expenses, as the name indicates, are those costs that you have no control over. You need to meet these obligations to carry on your life in the most basic manner. Failing to pay these liabilities could affect your quality of life deeply, and may result in lack of access to basic necessities like food, water and shelter.

In simpler words, these expenses are for the goods and services that you need - the goods and services that you simply cannot do without. What qualifies as a ‘need’ may undoubtedly vary from one person to another. But broadly speaking, here are the main categories of essential expenses in the average person’s life.

Everyday living costs

Day-to-day expenses like rent, utilities, fuel and grocery costs fall under this category.

Taxes

This includes the taxes you pay at various points, like income tax, GST, property tax, and more.

Debt

If you have taken any loans to meet your major life goals, such as a housing loan, a vehicle loan or an education loan, the EMIs involved in repaying those debts are essential expenses.

Insurance

Insurance payments for essential or mandatory insurance plans like a life cover, a health cover and a vehicle insurance plan are also non-discretionary spends.

Healthcare

Lastly, any emergency healthcare expenses you may face are also unavoidable, thus falling under this category.

What are discretionary expenses?

Discretionary expenses are also quite easy to figure out. As the name indicates, these are expenses that you can easily choose to not spend on. These are not ‘needs.’ Rather, they are ‘wants.’ You have the discretion to steer clear of these expenses, because this would not affect the quality of your life or interfere with how you obtain the basic necessities.

Discretionary expenses can simply be defined as any cost that does not fall under the categories explained above. However, to help you understand this kind of expense better, let’s take a look at some examples. Here are some categories of discretionary spends.

Travel and leisure

All the expenses you incur for your travel and vacations are prime examples of discretionary spends. So are leisure and entertainment-related expenses like movie ticket costs or concert ticket expenses.

Luxuries and indulgences

Indulged in an expensive meal at the new place in town? Or purchased a luxury goods item? All these costs are also classified as discretionary spends, for understandable reasons.

Hobbies

The expenses incurred to sustain your hobby, whether it is something as simple as painting or reading or something as premium as golfing or fishing are all considered discretionary costs.

Why is it important to know the difference?

At the very outset, it’s important to clarify one thing - discretionary spends are not all bad. If you can accommodate them in your budget after accounting for essential expenses and savings and investments, then you can certainly go ahead and splurge.

However, when you are under budget constraints, perhaps because of heavy debt or because of a temporary lull in your income, you cannot afford to spend on discretionary items. This will deplete your savings and leave you with little or no funds to meet your basic and essential expenses.

To put things in perspective, you wouldn’t want to run out of money to pay rent or pay your taxes because you spend most of your income on a hobby this month, would you?

This is why it is important to know the difference between essential and discretionary spends. Understanding the difference can help you prepare a smart and sensible budget. It also helps you manage your money prudently.

How to cut down your discretionary expenses?

Eliminating unnecessary expenses from your spending habits may seem challenging at first, especially if you were not aware that you were overspending. But all it takes is a quick plan of action to streamline your spending habits. Here is what you can do to cut down your discretionary expenses.

Step 1: Write down your monthly expenses on a day-to-day basis.

Step 2:Review your expenses during the period.

Step 3:Classify each expense as discretionary or essential.

Step 4:Identify the areas where you tend to spend impulsively.

Step 5:Repeat this process for another month or two.

Step 6:Note any patterns of discretionary spends to identify the weak spots in your spending habits.

Step 7: Actively try to refrain from spending on the things you tend to overspend on.

Summing up

If you tend to spend too much on discretionary items, the ideas given above should help you cut down your impulsive spends. Remember to take it slow and cut down your discretionary costs bit by bit. Drastically reducing them could make you overspend on unnecessary things after a brief period of restraint. And keep in mind that once in a while, it is okay to indulge, as long as you do not overdo it.

Needs vs. wants

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