Necessity Costs—What do People Spend Their Money On?

5 minute read

That crisp, new jacket would complement my wardrobe perfectly, but I can't delay the dishwasher repair any longer—even an XXL pack of paper plates only lasts for so long. And how's my fridge empty again? Feels like it was just yesterday that I had to drop a fortune for a shopping cart barely half full of groceries.

Rent, food, transport—the cost of living has been on the rise, forcing the average person to make difficult choices regarding their budgets. Many people are long past the point of simply passing up on luxuries; they have no choice but to prioritize different necessities, and occasionally even sacrifice some of them.

This raises the question: what makes something a necessity? When you literally cannot live without it—like food (3 weeks), water (3 days), and oxygen (3 min)? Or when you cannot live the life you currently live without it, meaning things such as electricity, hot water, bedsheets, shampoo, a smartphone?

Now, you might be thinking:

“The last few are not really necessary, couldn’t they be considered luxuries?”

Well, where do you draw the line? That's what we're going to explore in this article!

Necessity Costs—What's a Luxury and What Isn't?

Necessity costs are not the same for everybody.

What one person considers a luxury, another may find it hard to live without.

With that being said, when we consider a large enough group of people, certain patterns start emerging. Thanks to those patterns we can confidently say what the average person considers a necessity, based on, you guessed it:

The way they spend their money!

The Housing category is mostly made up of rent or mortgage payments, but also includes utility bills, such as electricity and water. The fact that it takes the number one spot should not be a surprise—at 30% of the average person's total expenses, homeownership and basic utilities cost more than twice as much as food, which is the next biggest category.

If you own an entire house or apartment and do not have to pay rent or a mortgage, you are very lucky and in a great position to save a big part of your income! Of course there are some exceptions: many less fortunate people's living space consists of a single small room, sometimes shared with multiple other family members or friends.

Food here refers to groceries—eating out at a restaurant is a luxury and part of the category “other”. 

It's worth noting that many people opt for tasty but highly processed and unhealthy foods due to their low cost. This leads to health problems, which means that choice results in higher long-term costs. Money and food are closely related—to read more about nutrition, check out all articles on that topic here.

Transport can either mean a car and all its associated payments, or the costs of public transport.

This is a category that is highly age-dependent, as we'll examine below. Super adults over a certain age travel less, while public transport is often (nearly) free of cost for children and teenagers. The rise of remote work popularity since COVID-19 also impacts this category.

Insurance & Pension costs are usually based on your level of income, but they do mostly concern only those who are actively working. Those who are unemployed bring the average down.

Health costs naturally vary a lot depending on age, while entertainment costs are surprisingly almost the same across all age groups.

Predicting Your Money's Future

We now have an idea of how the average person’s necessity costs are distributed. However, some necessity costs change a lot depending on your age, and some necessity costs stay the same throughout your life.

Take a look at the graph below showing how your necessity costs today may differ, depending on the generation you're part of.

• Members of the Silent Generation spend the most on healthcare and the least on transport

• Boomers spend just as much on entertainment as all other generations

• Baby Busters spend the most on pension and insurance

• Millennials spend the most on groceries and eating out

• Zoomers spend the most on education and alcohol, and the least on healthcare

Keep in mind that this is relative to your total income—we’re talking about percentages here.

Suppose a 50-year-old (Gen X-er) takes home $5,000 per month,

while a 22-year-old (Zoomer) takes home $1,000 per month.

Now suppose they both spend about $100 per month on alcohol.

While the absolute amount is the same,

the Gen X-er spends 2% of their income,

while the Zoomer spends 10% of their income.

In other words, the amount of money they spend is the same, but the income portion that the younger person spends is 5 times bigger (10% instead of 2%).

Spending more on education while you’re younger and then spending more on healthcare as you get older is quite self-explanatory. What’s interesting is that people spend about 6% of their income on entertainment, regardless of their age—so whether it’s music, games, theaters, or cinema—the portion of your income that you commit to those is unlikely to change as you grow older.

In essence, our spending reflects who we are as people. As we know, no two people are the same, which is why necessity costs differ massively from one individual to another. However, the larger the group of people, the clearer the patterns. Understanding these tendencies can help you figure out how your spending differs from that of the average person, and whether that is in line with your values. It can also help you get a picture of what your spending will look like in the future.

I hope you found this article useful! My aim was to stir some thoughts in your brain, at least a little—did I manage to do that? Join the Facebook group to let me know, and to tell me whether there's anything you agreed or disagreed with!