Why is understanding the difference between wants and needs crucial for budgeting?

Understanding the difference between wants and needs is crucial for budgeting because it helps individuals prioritize their essential expenses over non-essentials. Needs refer to the basic requirements for living, such as food, shelter, and healthcare, while wants are additional desires that may enhance quality of life but are not necessary for survival. By distinguishing between these two categories, individuals can allocate their financial resources more effectively, ensuring that necessary expenses are covered before spending on discretionary items. This prioritization is vital for creating a sustainable budget that meets both short-term and long-term financial goals, ultimately leading to improved financial stability.