Needs vs. Luxuries

If someone asked you to write a list of things you couldn't live without, your car, clothes drier and microwave would likely make the cut. However, if your parents were asked to write the same list when they were your age, they might have labeled those same items as luxuries, a 2006 Pew Research Center study found. The study also found that as the years go by, people think they need more things. It's not always easy to distinguish between what you need and things you want, but doing so can help you budget your money for things you need and want most in life.

According to Scott Halliwell of financial institution USAA, you have two types of needs: absolute needs and near necessities. You'll die if you don't meet your absolute needs -- food, clothing and shelter. While you might be able to survive without your near necessities, not having them would make it difficult or impossible for you to work, go to school or contribute to your community. Near necessities include hygiene products, cleaning products and transportation. Everyone has the same absolute needs, but a near necessity for you isn't always a near necessity for everyone. For example, if you're in school, your textbooks are a near necessity, but if your friend doesn't go to school, books are a luxury for him.

The longer an item is around, the more people consider it a need. In 1996, most Americans put computers, dishwashers and air conditioners into the luxury category -- things that make life easier but that you don't need to get by. In 2006, however, most Americans considered all those items to be necessities. While it's true that you might need a home computer to do your homework or a cell phone in case of emergencies, thinking about what your parents or older siblings could do without in the past can help you identify expenses to cut. For example, you might need a cell phone, but that doesn't mean you need a smartphone with the largest data package, which is a luxury.

Your definition of needs and luxuries will be different from your mother's, neighbor's or brother's definition, but you can all use the same variables to determine your individual needs and wants. Factors such as your location and job -- or the job you want when you graduate -- determine what's a need for you. For example, in most of the United States, it's nice to have air conditioning, but if you live in a hot climate, it's a necessity, say 84 percent of people Pew surveyed. Most people would love to have home Internet, but it's not a necessity unless you work online or take online classes.

Whether you're still living with your parents or you've struck out on your own, developing a budget will help you be disciplined about your finances. Knowing the difference between your necessities and luxuries is an essential part of budgeting. Begin by listing your absolute needs -- money you spend or contribute to your parents for housing, food and clothes. Then list your near necessities, including any fees for school or extracurricular activities. Every time you're paid or given money, pay these expenses first. Now list everything else you spend money on. These are your wants. You can cut out some of these expenses to start saving money or to avoid falling short when your anticipated expenses exceed your income.