Where I Started: The Balanced Money Formula
I've long been a huge proponent of Elizabeth Warren and Amelia Tiyagi's book, All Your Worth, in which they outline the Balanced Money Formula, a general spending plan that they say should work for most people for their entire lives. I got into detail on this in my review of an old budget according to the formula, but just for a quick refresher, the formula is this:
(at most) 50% must-haves
(at most) 30% wants
(at least) 20% savings for tomorrow
Warren and Tiyagi are hardly the first to introduce the idea of "needs vs. wants" into budgeting, but I think they used the concept best, and they did a good job of explaining what they would count in each category while acknowledging that it's not always clear cut.
Food, for example, is required for human life, but often we eat for other reasons (entertainment, socializing) and we may buy a lot of "treats" at the grocery store that are really wants. Itemizing your grocery store bill is not a sustainable solution. The authors resolve this by suggesting that you use the FDA's guidelines for the normal spending amount for your household size as your basic "must have" groceries amount, and anything over that is automatically categorized as "wants."
Warren and Tiyagi are careful not to make "wants" a dirty word--they certainly don't think you should cut all of them, they think you should spend 30% of your income on them! But my own, internal process of personally judging whether an expense is a need or a want has started to seem really arbitrary.
Problem #1: What Are Needs? What Are Wants?
I mean, everything is a want, if you really think about it. Everything beyond what you need to survive. A subsistence budget would be, like, lifesaving medications and a basic diet of cornmeal and oats.
Housing expenses? Probably you have to spend some, unless you squat in a hovel in the woods, but where you choose to live is a "want." I spend $2000 a month on housing because I choose to live in Boston instead of Boise or Bangalore. Does that mean everything above Bangalore rent costs is a want?
Home internet is often considered a want, but I personally would find it very difficult to live my life without it. Electricity is a want. Running water is a want. Human beings lived for millennia without these things.
Just as there are things I currently classify as needs that, if I'm being honest with myself, are really wnats, so too are there things I classify as wants that many people firmly categorize as needs. I don't have a car, so I consider a car a want, but auto expenses are firmly in the "needs" category in most budgets. I'm currently happy to have my wife cut my hair, but before I had that option, I considered haircuts a need, and I certainly don't begrudge anyone who does the same.
The line between need and want often comes down to a bunch of things that aren't so clear cut:
Personal lifestyle & values: Internet is important to me personally and professionally. Maybe not so much if I were, say, a retired grandma who keeps in touch with her kids via text and frequently visits the library.
Trade-offs in other categories: The reason a car is a "want" for me is because I live in the city. It might not be a "want" for someone in the suburbs or the country.
How close to the edge you are: As your income increases, so does the bar for what counts as a need. It's easy for a rich person to say that gourmet cheese is a need (why it's FOOD, darling, and anyway, you simply CAN'T eat that Kraft nonsense, it's POISON). If you're in a situation where every penny counts, though, you're going to have a much more strict process for determining what's a need and what you can do without.
Problem #2: Administrative Inconvenience
It's a fairly involved process to determine if your money is in balance. You need to figure out your average spend in each subcategory--rent or mortgage, food, clothes, entertainment, and so on--as well as parse your paycheck to categorize the line items that are taken off the top, such as retirement contributions and health insurance.
It's even harder to bring the framework into your ongoing, month-to-month budget. You run into tons of situations where you have one purchase that includes both needs and wants. This includes food, of course, as Warren and Tiyagi acknowledged. And any purchase at a superstore such as Target where you may be buying things from multiple categories at the same time. Even purchases of a single item can tempt you to split the difference between needs and wants. I need pants for work, but I didn't need to spend $100 on a single pair.
So what next?
The simplest solution is to just abandon the idea of needs and wants and just figure you're in balance if you are saving enough. And there's something to that. Once money is spent, it's spent--it doesn't really matter to what extent your spending was necessary, or virtuous, or whatever.
But I do think there's a place for more detailed guidelines and rules-of-thumb. In my post on housing and transportation, I presented a rule-of-thumb budget and made an argument that housing and transit should be considered together. It may be that, when we abandon the needs/wants distinction, we can make some more pairings or combinations of conceptual categories where more spending in one category leads to less in another.
For example, I typically count groceries and restaurant spending separately, because groceries are a "need" and restaurants are a "want," but of course, I eat a finite amount, so more eating out can lead to less grocery spending and vice versa. Because of the fine line between eating out due to hunger, eating out for social reasons, eating out as part of a larger activity, etc., I had the bright idea to pair food and entertainment, which sounds crazy from a needs-and-wants perspective. But it simplifies a lot of things administratively, since you don't have to distinguish which eating you did for fun and which eating you did for sustenance.
I haven't had a chance to try this out in practice, so I'm not sure how it will work, but the idea of progressing beyond needs and wants opens the door to a lot of new ways organizing and considering my day-to-day costs.