Divide your monthly pay in half. That number is the amount of money you’ll allocate for needs. Housing, utilities, health insurance, groceries, transportation and prescriptions all count as needs. Some debt is considered a need as well, such as credit card payments or car payments. If you miss payments, your credit score is negatively impacted. Other needs include child support and alimony. Missing payments for either will get you in hot water. Therefore, it’s a need.
But that’s not an exhaustive list. If you’re not sure what’s a need versus a want, consider the impact if you take it away. Health insurance, for example, is a need because you’ll incur fines if you forgo coverage. Plus, it’s essential for your wellness. Trickier situations, such as whether your cell phone is a need or a want, take more thought. It might be a need, but owning anything above a base model cell phone and basic phone plan tilts more toward a want.
“People don’t realize that many of their needs are really classified as wants (such as cable and morning lattes) and they may blow this ratio quickly,” Andrea Woroch, a consumer and money-saving expert, told SmartAsset. She suggests starting “by making an honest assessment of your spending and look for ways to improve and cut back.”