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Know your numbers · Lesson 3 of 12

Needs, Wants, Fixed and Variable Costs Explained

Sort every cost two ways, needs and wants, and fixed and variable, to see where in your budget you have room to change.

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Every cost you have can be sorted in two simple ways: needs and wants, and fixed and variable. Together they show you where you have room to change. This lesson teaches both, with plain examples you can match to your own life.

Needs and wants

Needs are the things you must have to live and to work: a home, food, basic clothes and getting to your job. They also include things that protect your money, like insurance and an emergency fundemergency fund: Money kept in an account you can reach quickly, to cover unexpected costs or a drop in income without borrowing. How much to hold depends on your circumstances, and official guidance differs by country.Full entry in the glossary.

Wants are upgrades. They are nice to have, but not necessary. Official consumer guides from agencies such as the US Consumer Financial Protection Bureau use the same split.

Two columns. Needs shows a home, food, basic clothes, getting to work and insurance and savings, labelled Must have to live and work. Wants shows a fancy coffee, a new phone, a concert ticket and a sparkle labelled Upgrades, with the note Nice to have, not necessary.(opens the full-size picture)
Needs keep you housed, fed and working. Wants are upgrades.

The line is not the same for everyone

The line between a need and a want is not the same for everyone. A car can be a want if you live near a bus route, and a need if there is no bus at all. A consumer agency in Canada makes the same point: needs and wants are not the same for everyone.

Many costs are part need, part want. Food is a need, but eating out is mostly a want. When you are unsure, ask a simple question: do I need this, or do I just really want it?

A car beside a bus is tagged Want for a person near a bus route, and the same car on its own is tagged Need when there is no bus at all. A split plate says Need: groceries and Want: eating out. A card asks, Do I need this, or do I just really want it?(opens the full-size picture)
The same car can be a want for one person and a need for another.

Fixed and variable

The second way to sort costs is by how they behave. Fixed costs are the same every month, like rent or a loan payment. Variable costs change from month to month, like food, fuel and going out.

This matters for planning. You can count on a fixed cost, but you need to estimate a variable one, and that is where your tracking from the next lesson helps.

Two rows of bars from January to June. Fixed, same every month, has six equal bars, with rent and loan payment as examples. Variable, changes each month, has six bars of uneven heights, with food, fuel and going out as examples.(opens the full-size picture)
Fixed bars stay level. Variable bars go up and down.

Four boxes

Put the two ways together and you get four boxes. Rent is a fixed need. Groceries are a variable need. A streaming subscription is a fixed want. Takeaway meals are a variable want.

Fixed costs are hard to change quickly. Variable costs and wants are usually where you have room. That is reasoning from what the words mean, not a research finding, so check it against your own costs.

A grid with Need and Want down the side and Fixed and Variable across the top. Rent is a fixed need, groceries a variable need, a streaming subscription a fixed want and takeaway meals a variable want. The want and variable boxes are outlined in green with the label Room to change.(opens the full-size picture)
Rent is hard to change. The green boxes are where you usually have room.

Small and forgotten costs

Small, repeating costs add up. A Canadian consumer agency’s worked example shows that three dollars a day on coffee is more than $1,000 a year.

It is also easy to keep paying for things you do not use. In one study of gym members on a monthly plan, people went about four times a month. They paid more per visit than a ten-visit pass would have cost. You can read the study abstract if you are curious.

A coffee cup labelled $3 a day, with an arrow to a stack of coins marked $1,000+ a year and the warning Easy to forget. On the right, a gym Monthly plan card beside a calendar with four ticked days, labelled About 4 visits a month, with Per visit on the plan: more, and 10-visit pass: less.(opens the full-size picture)
Small costs repeat all year, and unused plans keep charging.

This is not about guilt

This is not about cutting every want. Wants make life enjoyable, and a budget with no room for fun is hard to keep. The goal is to see clearly, then choose the wants that are worth it to you.

If a coffee or a concert ticket is worth it, keep it. If you have a gym card you never use, that is a cost to look at.

A heart and a green Fun jar, labelled Room for fun. Beside them a magnifying glass over a list: fancy coffee and concert ticket are ticked, and gym card I never use is crossed out. The label says Worth it.(opens the full-size picture)
Keep the wants that are worth it. Look hard at the ones you never use.

YOUR TURN

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Read the full lesson script

Welcome back. In this lesson, you'll learn two simple ways to sort every cost you have: needs and wants, and fixed and variable. Together, they show you where you have room to change.

Needs are the things you must have to live and to work: a home, food, basic clothes, getting to your job, and things that protect your money, like insurance and emergency savings. Wants are upgrades: nice to have, but not necessary.

But the line isn't the same for everyone. A car can be a want if you live near a bus route, and a need if there's no bus at all. And many costs are part need, part want. Food is a need. Eating out is mostly a want. A simple test: do I need this, or do I just really want it?

The second way to sort costs is by how they behave. Fixed costs are the same every month, like rent or a loan payment. Variable costs change from month to month, like food, fuel, and going out.

Put the two together, and you get four boxes. Rent is a fixed need. Groceries are a variable need. A streaming subscription is a fixed want. And takeaway meals are a variable want. Fixed costs are hard to change quickly. Variable costs and wants are usually where you have room.

Small, repeating costs add up. Three dollars a day on coffee is more than a thousand dollars a year. And it's easy to keep paying for things you don't use. In one study of gym members on a monthly plan, people went about four times a month, paying more per visit than a ten-visit pass would have cost.

This isn't about cutting every want. Wants make life enjoyable, and a budget with no room for fun is hard to keep. The goal is to see clearly, then choose the wants that are worth it to you.

So remember: needs keep you housed, fed, safe and working, and wants are upgrades. Fixed costs stay the same, and variable costs change. And the most room is usually in variable costs and forgotten ones. Before the next lesson, mark each cost from last month as a need or a want, and as fixed or variable. Next, you'll see where your money really goes.