How can you budget for happiness?

The word budget typically has a negative connotation to it. After all, it’s a restriction to a limited resource (money). A budget is really just one tool in the personal finance toolbox for following a plan. But if money is limited, how can you budget for happiness?

Life is a journey to define yourself

When I first started taking control of my finances, I read “personal finance” books such as I Will Teach You To Be Rich. They teach the basics of managing money and budgeting. But after a while, I realized that I was really trying to reach “Financial Independence”. Yet, it doesn’t stop there since if you do reach independence, what then? So for me at least, it becomes a question of what do I want to spend money on and how much? What’s the balance between spending and saving? And what do I value in my life to spend money on?

These are all personal questions and there’s no one correct answer although books such as Your Money or Your Life can help guide you. So I was curious to read a post about 7 ways to budget for happiness which touched a little on the psychological aspect of this journey. After all, the seven things I might budget for would likely make you quite miserable!

In thinking some more about this topic, I thought it might be interesting to categorize spending in a way that may help with prioritizing.

Spend vs Save

Most things in life comes down to balance. As much as I might like to binge-watch The Office over a weekend, it’s better overall if I watch an episode and then mow the lawn. It’s no difference with spending vs saving; spending 100% of your income is not a good state, nor is saving 100% of your income and denying yourself things you might want.

Your spending vs saving percentage comes down to your personal income levels and goals. One common rule of thumb is a 50/20/30 split of after-tax income between Necessities (50%), Long-Term Savings & Debt Payments (20%) and the remaining 30% on Lifestyle & Fun. This strategy was popularized in All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren.

Against those three categories, my current monthly spending is roughly Necessities (39%), Savings & Debt (54%) and Fun (7%). Yes, I’m quite boring in my free time with no exciting / expensive hobbies. But I’m no Mr Money Mustache and I will spend money to save Time, or spend more for a better quality item that I hope will last longer. I personally aim for efficiency in what I spend money on.

Needs vs Wants

When we spend money, there’s usually a clear distinction between a “need” and a “want”. It certainly helps to think of everything you spend money on in those terms. Do I need the latest iPhone 7, or do I want it?

Now there’s nothing inherently wrong with wanting an iPhone 7 or whatever, but it might be something that could be bought later or saved for over several months. Whereas a need, likely requires money available right now such as paying a gas bill.

In starting a journey to Financial Independence, the first thing is to start tracking your spending and see where the money is going. Only once you’re tracking it can you decide what an appropriate level is.

More Needs

Thinking about categorizing needs and wants however, brought me around to Abraham Harold Maslow (April 1, 1908 –June 8, 1970), a psychologist who studied positive human qualities and the lives of exemplary people. In 1954, he created the Hierarchy of Human Needs and expressed his theories in his book, Motivation and Personality.

Diagram showing Maslow's Hierarchy of Needs: Physiological, Safety, Belonging, Esteem and Self-Actualization1. His theory is built upon the premise that the most basic level of needs must be met before an individual will focus on the secondary or higher level needs. In very basic terms, if you’re not able to find enough food to eat, you’ll likely be more interested in avoiding starvation than writing the next great American Novel.

His levels of needs (lowest to highest) are defined as

  1. Physiological
  2. Safety
  3. Love / Belonging
  4. Esteem
  5. Self-Actualization

Let’s look at how this hierarchy relates to financial independence and spending. Terms marked in bold relate to categories I use in my own budget.

1. Physiological – Food, water, shelter

At the bottom of the pyramid, everything is a “Need”. You need shelter, you need food and water as well as heat and warmth. This level covers rent / mortgage payments, utilities, clothing, groceries and taxes.

Extras such as a mobile phone or cable TV or even a car aren’t included at this basic level. You don’t Need cable TV when it comes down to survival, but you may certainly Want it. But your monthly spending must first accommodate these basic needs.

2. Safety – Security of Body, Employment, Family, Property

So now that we’re safely in some accommodation with food, utilities and have something to wear, it’s time to look at the next level: Safety. This is an interesting level as it includes a variety of different expenses. These categories also tend to be Needs rather than Wants.

Security of Body

A mobile phone is pretty much essential these days and is a great security device since you can ask for help from any location, so I’m inclined to put mobile phone service here. I would also include medical expenses in this category.

Security of Employment

If you don’t have job security, you might spend money / time on finding an alternative job or learning new skills. You can also spend Time on this too: become more valued by being engaged, helpful and proactive at work. Don’t burn bridges as you never know what lies ahead or who you might be working for.

Security of Family

In securing your family, some areas to think about are Life / Disability Insurance as well as Estate Planning or otherwise making a Will. These can be offered as a discount at your place of work or as part of employment benefit packages.

Maintaining home security devices (e.g. smoke or fire detectors, fire extinguishers) and any associated monitoring services also fit into this category.

Security of Property / Resources

If you own a house then keeping it safely maintained is a priority, so money should be set aside for house repair.

Home insurance is another big unavoidable expense, although rental insurance is a lot cheaper. Insurance premiums depend on the housing location but also on the deductible / coverage amount. It’s important to review your policy regularly to ensure you are suitably covered.

I would also include other forms of debt payments in this category since if loans aren’t paid when due, your security is threatened. This can include Student Loans, Personal Loans and credit card fees, even if the rationale for the loan comes from a higher level want such as a better education (self-actualization) or better standard of living (esteem).

I included transportation in this Level too, but that’s perhaps more of a personal choice. It could also go into a higher level if it’s not considered a Need. But along with auto ownership comes a license fee, insurance premium, gas and maintenance.

3. Belongingness – love, friendship, intimacy, family etc.

We all need social contact to become better people. Even I recognize that and I’m far down the socialness scale. Ironically it took several episodes of the Dog Whisperer but I finally realized humans are engineered to be social. Categories in this level are almost entirely Wants rather than Needs.

For me this level includes categories such as internet service (got to communicate somehow), gifts (be nice and/or charitable), and dining out (in public!).

4. Esteem – confidence, self-esteem, achievement, respect etc.

This is a harder level to group expense categories under. I’ve interpreted this as things like “Home Improvement” where we might buy things for our house that are more of a want than a real need.

Improving yourself is another area that seems to fit, both physically (Fitness) and mentally (tuition, evening classes).

I added entertainment to this level too although that’s another personal judgement on my part since they make me happy. So spending on Music, Movies, Games and Books is all included.

5. Self-Actualization – morality, creativity, problem-solving

And now we reach the pinnacle. You’re fed, clothed, housed, feel safe and are confident. So what are you going to spend money on to improve yourself and your situation?

Admittedly my spending in this category is pretty lame. I included Travel here, as well as Computing which covers my work on

My personal pyramid

Here’s how my Budget 4.5 came out when I mapped each category into one of Maslow’s Levels. I draw it to scale too by area, but I think the amount of spending in each Level isn’t that important.

Diagram showing my Budget when grouped using Maslow's Hierarchy of Needs

In my case, everything I categorize as a Need fell into Levels one & two. Only two categories that I personally had counted as Needs (Home Improvements and Internet Service) showed up in Levels three & four. All my discretionary categories (wants) were within Levels three, four and five.

So if you’re starting out to evaluate your expense categories then thinking of your spending in terms of Maslov’s levels isn’t such a bad idea.

Next steps

Once you’ve established where and what you spend your money on. It’s time to review it. Regularly. Challenge yourself if you can optimize it further.

One straightforward way to reduce spending is take advantage of lower interest rates. Perhaps it makes sense to refinance a mortgage for a lower monthly payment. You might also be able refinance a student loan or restructure credit card debt.

You can always look for ways to spend on any of your existing expenses now that you know what they are. An honest look at what makes you happy and what kind of person you want to be can help you prioritize your spending.


Everyone has their own personal definitions and objectives, so there’s no perfect way of how to allocate your income. But viewing your spending through the lens of Maslow’s pyramid might be one way to help clarify needs vs wants, or even highlight a spending category that is out of place.

How do you budget for happiness?

Quote of the Day

Success is not the key to happiness. Happiness is the key to success. If you love what you are doing, you will be successful.

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