Categories of spending: Understanding needs, wants & wishes

There's an old saying: Money is meant to be spent. After all, why else are you working if not to enjoy your money and make life better for the people you love? However, it's important to know how and why you spend money to control your habits so you're not spending recklessly.

Let's take a closer look at the main categories of spending: needs, wants and wishes. These will look different for everyone. Understanding these three buckets, and how you look at them with your priorities and values in mind, will help you choose how to spend—and save—wisely.

This area of spending includes the basic necessities:

• Housing. Your rent or mortgage payment as well as home maintenance costs—whatever it takes to keep a roof over your head. Housing costs should also include homeowner or renter insurance so you are covered in case of disaster.
• Utilities. Having a home is important, but you also need to keep the water running and the heat, air conditioning and lights on.
• Food. Everyone needs to eat.
• Clothing. Whether you shop at a thrift store or retail boutique, it's important to have comfortable, well-fitting, in-season clothes to wear.
• Health care. Depending on the kind of health insurance you have, you might need to pay for premiums, co-pays and deductibles as part of your overall out-of-pocket health care costs.
• Transportation. Whether you lease a car, own a car, or use public transportation, this is an essential category of spending to help you get to work, visit friends and family, and participate in everyday life.

You might have some flexibility in spending on these needs. Some people can get by with a modest clothing budget by purchasing used clothes from thrift stores while others might save money on utilities by skipping air conditioning (based on where you live). If you know how much you spend on your needs, you'll have a solid foundation for your monthly budget.

If you can cover your needs with room to spare in your budget, you could have an enhanced lifestyle. Your spending might expand to include things you want but don't necessarily need:

• Take-out meals and restaurants. While food is a need, going out to eat is not. Relying on groceries is far less expensive than dining at restaurants, but you might decide you want that every so often.
• Gym memberships. Instead of exercising at home or outdoors, you might go to a dedicated place to focus on your physical fitness.
• Subscriptions. Reading your favorite magazine every month, listening to podcasts and music ad-free, or watching shows and movies via an online streaming service—these monthly costs may seem like a need but are actually just a want.
• New (or new to you) car. If you're relying on public transportation or a hand-me-down car, you might be thinking about buying or leasing a car of your own. If there are other transportation options available to you, this is definitely something that's just nice to have.
• Vacation. Traveling and staying at hotels or resorts might not be a need, but having new experiences in new places is an essential element that people crave at times. Taking a low-cost trip, such as camping, might fill this want—or you might find that a beach getaway is something you're willing to pay for.

The difference between needs and wants is about upgrading your lifestyle. It's possible to have a simple lifestyle on a budget that covers your needs and a few wants here and there, but if you want more features and frills, you'll need to spend a bit more.

If your income increases or you inherit a great deal of money, you might be tempted to upgrade further to a luxury lifestyle. This often includes spending on items and experiences that aren't necessary to have a nice life but let you feel indulgent—you could think of them as the icing on the cake.

Most people call luxury purchases "wishes" and try to strike a balance between attaining them and fulfilling other needs and wants of life more simply. For example, you might wish to take a long international vacation every two or three years, so you save money for it by driving a used car you've owned for years rather than buying a new one. Other common wishes include:

• High-end fashion. Beyond basic clothing, you might wish to spend more on name-brand designers or fashion labels.
• Luxury/sports car. It's great to have a well-functioning vehicle that is comfortable to drive, but you might wish to have a faster, higher-performance vehicle.
• Larger house or vacation home. You might have your heart set on a better neighborhood, a more exciting city or a house with more room or a bigger yard. Or you might dream of having a second home in the mountains or on the beach.
• Higher ticket travel. You might upgrade from wants to wishes by switching to a high-end resort or flying first-class.
• Cleaning service. Hiring someone to clean your home can grant the wish of having more free time and a cleaner living space.
• Personal trainer/nutrition coach. Going beyond a gym membership by hiring professionals might give you an extra boost to reach your fitness goals.
• Private education. Having your kids attend a private school can be worth the extra spending if it's important to your family. And paying for private tutors could help your kids achieve even more academically.

It's valuable to maintain a healthy blend of needs, wants and wishes in your life. Here are a few things to consider when incorporating each of these categories of spending into your financial planning:

Be mindful about your spending decisions, and make sure they're aligned with your values and priorities. Ask yourself realistically what things you may want to give up if you've prioritized more spending to your wants or wishes. Buying yourself breakfast every morning seems fine in the short term, but the tradeoff could be that it keeps you from saving enough money for your long-term wish of going on a Caribbean cruise.

That being said, you don't have to live a life of extreme frugality. It's important to treat yourself to a few wants that are important to you. After all, if you feel deprived, you might be more likely to splurge spontaneously in a way that does not align with your spending goals and overall financial planning.

Keep in mind that getting a larger house or fancier car doesn't always make people happier. If you get a big promotion and pay raise at work, be sure to save some of it—but give yourself permission to splurge on a purchase that you've been dreaming of. Do, however, beware of unplanned impulse buys.

For the big picture, you'll want to coordinate your needs, wants and wishes with your long-term financial goals. Even if it feels far off, make sure you're saving enough for retirement. Find space in your budget for monthly contributions to savings along with other money goals, such as an emergency fund.

Long-term financial goals can also be divided into needs, wants and wishes. This way, you can regularly check in on them to see whether you're saving enough or you need to pull back on spending. In the end, it's okay to enjoy your wants and wishes so long as your needs are covered and you're investing in your future.

Connect with a Thrivent financial advisor or use Thrivent's Money Canvas free online coaching services to stay on track with your financial goals.