How to Figure Out if an Expense is Actually Necessary

Written By Jeff Hindenach
Last updated November 12, 2017

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Personal Finance
May 7, 2015

Simple. Thrifty. Living.

We live in a world in which our tastes are shaped by marketing experts, and these people earn big salaries by deliberately confusing luxury and necessity in the mind of the consumer. Personal budgeting skill depends on being able to figure out when an expense is necessary, but this isn’t a straightforward process. It’s easy to lose track of the dividing line between wants and needs and fall into the trap of debt because you went for a flashier car or bigger house than you could reasonably afford. So, how do you distinguish between wants and needs? Here are three questions to ask yourself that can help identify which expenses are necessary.

Food is essential to stay alive. However, you can’t use that fact to justify having dinner at the city’s most exclusive sushi restaurant. If your budget is tight this month, your body can be just as well-nourished at one-tenth the cost by buying groceries and cooking at home. Similarly, transportation is necessary for you to maintain normal activities of life, but any reliable car will do the trick; you don’t need the latest model just to get from one place to another. However, cell phones and data plans, which may seem like a luxury, actually fill a crucial niche of utility; there are no cheaper alternative technologies.

This is a good question to ask yourself when you’re contemplating a big investment such as education. Likewise, high-quality tools that will allow you to advance in your craft or profession are often necessary when viewed in this light, whereas an expensive concert ticket or spur-of-the-moment vacation fails this test. Long-term thinking is the key here: instead of getting distracted by the momentary thrill of a possible purchase, think of yourself in future years. Will this purchase still matter to that future you? If it will, then go for it if you can.

Sometimes our purchase decisions stir strong emotions, and noticing how you feel is another valuable guide to distinguishing luxury from necessity. Paying rent or buying light bulbs or laundry detergent are not transactions that generally stir any self-doubt within us. It’s just a thing you do to keep the routines going. However, if you notice yourself feeling anxious about a spending decision, that’s often a good indicator that you’re thinking of buying a luxury item. Instead of just thinking how bad you’ll feel if you don’t acquire the item, try running a positive alternative scenario in your mind: picture yourself putting the same money into a savings account instead, and then check your feelings. Do you feel more relaxed? That may be a good reason to at least postpone this decision for a while.

It’s important to your well-being to enjoy a few luxuries with the money you work hard to earn, but wise budgeting means understanding which items are necessities and making sure those are covered first. After that, you can budget for the “frills,” whether that means a fancy latte on your way to work or a weekend at a beach resort.

About the Author

Jeff Hindenach

Jeff Hindenach is the co-founder of Simple. Thrifty. Living. He graduated from Bowling Green State University with a Bachelor's Degree in Journalism. He has a long history of financial journalism, with a background writing for newspapers such as the San Jose Mercury News and San Francisco Examiner, as well as writing on personal finance for The Huffington Post, New York Times, Business Insider, CNBC, Newsday and The Street. He believes in giving readers the tools they need to get out of debt.

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