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Budget Categories Based on Maslow’s Hierarchy of Needs

This article was written by in Planning. 15 comments.

When I started my first real budget as an adult, the concept was not difficult. I knew I had to track my spending and keep myself from paying more than necessary for expenses I could control in order to fix my financial situation. To reverse the trend of increasing debt every month, I came up with a simple spending plan that suited my needs.

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Although the software I was using to manage my personal finance — at that time, a free version of MoneyDance, though I also experimented with GnuCash — categorized my expenses into at least twenty categories. Like I discussed with J.D. Roth from Get Rich Slowly on this past Sunday’s podcast, complicated budgets don’t work as often as simple plans that break spending down into the most core components.

J.D. is a fan of the Balanced Money Formula of budgeting, which is an overall approach of spending 50% of your after-tax expenses on “needs,” 30% on “wants,” and 20% on “savings.” These ratios serve as a goal that one can strive to reach eventually, much like the ideal weight I’m slowly working towards today. But this is not a full budgeting solution. It lays the groundwork, but you need to examine your spending with a little more detail, possibly asking yourself and answering a few questions.

What constitutes a need or want? Some areas of spending can be reason to be needs when they may actually be wants, and what one person wants may be something another family needs. For an entrepreneur whose business relies on access to the internet, this is a need — and a business expense. Is a cell phone a need or a want? What about a smart phone versus a basic phone? Where does charity fit into the picture?

You will likely find that some expenses are partly needs and partly wants. Food is necessary for survival, but is dining out every week the only option for keeping a family alive?

Even once questions like the above are answered, budgeting hasn’t really started. You cannot effectively budget without tracking your finances and knowing what you are spending — and what you could spend in the ideal “low expense” world — within a variety of real, meaningful categories. If I didn’t create a category for my rent expenses when I budgeted, I may not have worked to reduce that expense at a time I really needed to keep my expenses low. If I didn’t focus specifically on the amount of money I spent on food, I wouldn’t have been able to reduce my spending at restaurants, fast-food and otherwise.

There is an essential list of categories that you need to budget for when you’re looking to reduce your expenses due to an inability to save for the future. The key is finding the balance between a plan simple enough to maintain motivation while detailed enough to have a meaningful effect. Looking at just your wants, needs, and savings is good for tracking your budgeting success, but in practical terms, you’ll need to determine specific categories.

When considering budgeting, I like to refer back to Maslow’s Hierarchy of Needs and my college Introduction to Psychology course. Physiological needs come first, including food, water and shelter (rent or mortgage, for example), and clothing. Sex is also a physiological need, but budgeting money to spend for sex might be beyond the scope of financial needs.

Once physiological needs are covered in the budget, you need to think about safety needs. Health insurance is probably towards the top of this list, despite the fact that most people don’t budget for insurance — they rely on an employer to just deduct an amount from a paycheck. Insurance is an oft-forgotten line item in a budget, perhaps due to the need for simplification or due to a lack of consideration. Also in the safety category, but arguably a physiological need as well, are the utilities that cost money, like providing power to your home. Humans survived for many thousands of years without electricity, though, so I would not rank this as high as shelter and food. Nevertheless, it’s important for living in modern society.

All other categories and the other levels in Maslow’s hierarchy could be considered wants. Education, gift-giving, dining out, and entertainment should be part of your budget. Love and belonging, esteem, and self-actualization are the higher levels in the pyramid-shaped representation of the hierarchy. The expenses below apply to everyone within the household and do not include taxes. Debt repayment, savings, and investing aren’t on this list, though they play important roles in budgeting. They might be suited to be placed under the 20% “savings” banner, while the below categories focus on the “wants” and “needs” of the Balanced Money Formula.

Level 1: Physiological Needs

  • Housing: rent or mortgage payments
  • Basic sustenance: groceries, cooking and water
  • Clothing: non-designer brand essential wear

Level 2: Safety Needs

  • Power (electricity, gas)
  • Basic telephone service
  • Insurance: health, home, and life
  • Vehicle or other transportation
  • House repairs and maintenance
  • Expenses related to operating your business

Level 3: Love and Belonging

  • Gift-giving
  • Charitable contributions
  • Entertainment
  • Spending time with friends and family

Level 4: Esteem

  • Work-appropriate clothing
  • Education and professional development
  • Dining out
  • Fitness beyond basic health needs

Level 5: Self Actualization

  • Hobbies
  • Internet, if not needed for generating income
  • Television
  • Vacations, non-essential travel
  • Luxuries

What do you think of the above list? Should anything be added or moved to a different hierarchy level?

Updated October 21, 2015 and originally published May 10, 2011.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 15 comments… read them below or add one }

avatar 1 Anonymous

I think the idea of breaking a budget down in this way is a super idea, Flexo.

I don’t think you need to make one decision to go simple or complicated with a budget. Lots of people like a simple budget for day-to-day living. But drilling down deep and putting things into categories like this can provide HUGE information feedback benefits. So do that too! I like to do an in-depth budget on New Year’s Day. What you learn from doing the in-depth budget can help you put together the more simple one that you can use day to day if you prefer.

Some spending items will fall into more than a single category on your hierarchy of needs. I understand that you were joking with your “Spending on Sex” comment. But the full truth is that we ARE spending on sex when we buy a red sports car or a tech gadget that costs more because it is the latest and coolest. The tricky part is that we are not spending ONLY on sex. We really do need a car to get around and the tech gadget for whatever it does. To fully appreciate where your money is going, you need to allocate the spending in percentages to different categories.

Some will look askance at this idea on grounds that it is not practical. But in the long term it has a big dollars-and-cents effect. It helps you understand WHY you are spending and that helps you manage spending much more effectively. I could give lots of examples of things I’ve learned from these in-depth budget sessions. The benefit is not in the budget document itself. The benefit is the learning experience that digging down deep brings on.


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avatar 2 Ceecee

This whole idea makes the grand assumption that people have anything left for wants. CNBC just today reported that more people were losing their health insurance and/or going without medical care and prescriptions this month. This is going to break the bank for lots of people and businesses if it isn’t controlled.

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avatar 3 Luke Landes

The concept of budgeting doesn’t assume someone has something left over for wants — in fact, for anyone who needs to focus solely on covering needs, budgeting is much more imperative. That’s the point of organizing a budget using Maslow’s Hierarchy of Needs. It highlights what needs to be satisfied first in your budget.

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avatar 4 Sarah

I may be missing the point of doing this…but what does this do that actually affects how a person budgets? Cause people to re-evaluate their priorities? It seems like you’d still end up with roughly the same categories for expenses…

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avatar 5 Luke Landes

There are two points — determining the right categories that make sense for you (which you can do with or without a framework like Maslow’s, but a framework can get you thinking in the right direction) and prioritizing those categories and determining which are needs and which are wants.

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avatar 6 Anonymous

Where does savings/retirement fit in your hierarchy? In my budget, I deduct savings/retirement first and fit my needs and wants in on what is left. I periodically review my choices based on my priorities and cost. For me, this works because of its simplicity.

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avatar 7 Luke Landes

Savings and retirement doesn’t fit into the hierarchy, at least in this post, because I’m basing the categories on the Balance Money Formula, which puts savings in a separate category, away from “needs” and “wants.” But for a complete picture, I believe saving and investing fits on the second step of the hierarchy, Safety Needs. Savings provides financial security, and security is related to safety.

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avatar 8 Anonymous

I think power should go in level one, being warm is key to survival (shelter). I think phone service isn’t necessary. And having a personal mode of transportation is a luxury (same with entertainment and dining out).

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avatar 9 Anonymous

I like the way this is broken down in general. I think a lot of people need to break down wants versus needs a lot better than they already do.

One question :
Entertainment is in level 3 but then level 5 has several items I consider to be sub-sets of entertainment like TV, hobbies and travel. How does the entertainment item in level 3 differ from those items in level 5?

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avatar 10 Anonymous

I think this is a really interesting idea. Our budget differs slightly because our financial planner had us think about what do we need to be able to effectively work our jobs. So of course we need food, shelter, etc, but we also need to prioritize transportation to work, work clothes, and whatever else we need to complete our job. Of course you can’t go crazy on any of those work-related expenses, but it did get us thinking about how we need to keep our jobs so we would then have money to budget!

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avatar 11 Cejay

I agree with most of the levels except Level 3. I think the levels and entries may change depending upon how self confident and assured you are in yourself. But all in all, this was an interesting article and gives me something to thing about.

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avatar 12 qixx

As Ramit from another blog might say. Don’t just think, do. The principle here got me to rethink my budget and reorder the categories we use in our budget. I think the exact grouping is not the most important issue. Putting your budget categories into a priority list is the key point. Dave Ramsey tells people this all the time, If you ever don’t have enough to cover all you bills you must do this to decide who or what gets paid. Doing it before then might just help keep the bottom spending categories from taking money that puts you into a situation where you can’t pay everything. Great job Flexo.

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avatar 13 lynn

Your list is well organized.

I would consider shelter, food, basic clothing as needs, and everything else as wants. Even though safety issues are addressed in level 2 above, I feel they are under the shelter catagory.

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avatar 14 skylog

this is a good list flexo, but there are few i may have set differently. to me, power should be in level 1. my only other comment would be about “entertainment.” this is such a broad category, i just do not know how i feel about it. there are a couple of items listed in higher levels that could easily be with entertainment.

that said, great post! it is making me think.

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