Want to spend less and save more money? Redefine this one word

When it comes to making a budget, most of us know there are two basic categories of spending: the things we have to pay for, and the things we don’t.

It’s very easy to tell which things are non-negotiable: our mortgage or rent, utilities, medical costs, transportation, food. For parents, childcare would also qualify. They are all expenses that fall into the bottom levels of Maslow’s Hierarchy of Needs — when they’re taken care of, we don’t feel their effects. But when they are missing or lacking, we can feel intense anxiety.

We all need to meet our basic needs before we can accomplish our greater financial goals. For example, you probably can’t expect to save for a house down payment if you are barely able to cover your monthly food costs. Saving for retirement is also much easier once you’re no longer buried under a mountain of student debt.

Shelter, food, paying off debt — those are necessities. But sometimes, thinking in terms of “necessities” can get us into serious financial trouble.

For example, we can’t go without housing. Most personal finance experts will agree that it’s typically affordable to spend up to 30% of one’s annual income (before taxes) on housing. Yet most Americans are spending 37% of their incomes on housing costs, according to the U.S. Department of Labor. If your household income is $100,000, that seven percent increase could account for $7,000 in lost potential savings each year.

I know how easy it is to get lured into the higher-cost housing trap. My partner and I recently moved from Midtown Manhattan, where he’d chosen to live out of convenience four years ago, to a less convenient (but thankfully much quieter) part of town. We didn’t even have to downsize; just by moving to a different neighborhood, we’re spending nearly $1,000 less per month than we were previously.

There’s no denying that housing is a necessity. But more expensive housing, whether for the sake of a “better” location or more space, is a luxury, and I think that’s something a lot of us take for granted. We may think our baseline expenses are necessities, but getting comfortable with higher standards of living often means paying more than we really need to — and perhaps even overspending.

Of course, thinking of things as necessities doesn’t just apply to big-ticket budget categories like rent. It’s extremely common to think we need personal care or clothing items that we actually don’t.

That’s something Desirae Odjick, the brains behind the popular personal finance blog Half Banked, has experienced a lot first-hand.

“I think this happens so much, especially with the way social media shows us perfectly-polished images of what ‘everyone else’ has,” she told me. “I've definitely been lured into buying clothing and decor that I felt like I needed to have because I kept seeing it on Instagram! (But seriously, who hasn't?).”

She went on to explain that social media isn’t the only culprit for overspending on material items we think we need. “Our in-person environments can create the exact same effect. If everyone else in your friend group is buying something, or spending money on an experience, it very quickly feels like you need to spend money on it, too. The same goes for the workplace — it's so easy to normalize take-out lunches, expensive clothing or networking events as essentials because everyone else is buying them, but even when they feel like necessities, they really aren't.”

In order to wiggle your way out from under excessively spending on what you think are necessities, here are a few questions to ask yourself before making a purchase — big or small.