“If you buy things you DO NOT NEED, soon you will have to sell things that you NEED” – Warren Buffett
It is possible to categorize all of our expenses and spending activities into two categories: “necessities” and “wants” for effective financial planning. When you spend too much money on your wants and too little money on your necessities, you are mismanaging your financial resources. In order to meet your needs first, you should spend or save money before spending or saving money for your wants. Once you’ve categorized all of your costs into these categories, it’ll be much easier to plan your financial future.
What constitutes a need is anything that you require regardless of your financial situation or circumstances. These are the items that must be addressed first, and only after that can you turn your attention to other matters. Among the many instances of Needs are rent or mortgage payments, food, and utility bills, school/college fees and expenses for children’s education, savings towards retirement planning, medicines, and hospitalisation, as well as family outings and vacations (within reasonable limitations).
Abraham Maslow published a famous paper titled “A Theory of Human Motivation” in 1943. Maslow mentions a five-level hierarchy of requirements in this paper: With Physiological Needs, Safety, Belonging and Love, to Self-esteem and Self actualization falling at levels 1 to 5.
Before moving on to the next stage, each stage must be completed. Maslow’s theory states that humans should strive for self-actualization at the fifth level.
These are things you wish you had, but they aren’t more important than your Needs. When compared to your child’s fees or education savings, a car, for example, is a Want. You can live without a car, but child education is essential and should not be overlooked.
Wants can become Needs for others, and vice versa. It is entirely dependent on one’s personal lifestyle and mindset. But the essential idea is that you must distinguish between your Needs and Wants in the short to medium term and in the long run.
Taking a longer vacation, expensive apparel that exceeds your normal needs, an expensive car or any car that is over your budget are examples of Wants. While you should not ignore your desires, your necessities cannot and should not be risked as a consequence of your desires.
Here are some ideas for controlling and limiting non-essential spending.
1. Don’t go into debt on things you don’t need — if you don’t have the money, save it till you can.
2. Avoid impulse purchases – Don’t buy something if you haven’t planned ahead of time to get it. Take a look at your finances and think about it. You can always have it later if you still want it and can afford it.
3. Cut out unnecessary expenses – You don’t have to completely give up something you enjoy, such as going out for dinner. Depending on your budget, you might be able to lower it to once a month instead of once a week.
4. Put it on your budget’s “wishlist” — Adding non-essential items to your budget in order of importance makes them easier to handle.
5. Isn’t there any way to postpone it? Think about what will happen if you don’t get what you want. Is it just a nice-to-have add-on or service? If it isn’t going to make a huge difference in your life, don’t bother about it.
6. Couldn’t the money be better spent on something more worthwhile? You’ve probably got a long list of things you want. It’s possible that you’ll be able to get some right away. You’ll need to put money aside for the rest. Before you buy something non-essential, always ask yourself if you could spend that money on something else.
7. Isn’t it better to pay off more debt or put the money into investments that are aligned with your financial planning first? Consider that, in most cases, paying off debt is preferable to purchasing something you don’t require. It may also be a good idea to invest the funds elsewhere.
By asking oneself these questions, you are not depriving yourself of all privileges. It all comes down to keeping track of your finances and making informed financial decisions.
When it comes to conserving money, getting rid of demands is often the easiest and most successful method. Instead of going to the gym, you may get some exercise by running around the neighborhood. However, just because something is essential does not mean its price is set in stone. You might choose a less expensive place to stay without sacrificing your quality of life. Another example is carpooling instead of driving alone to work every day. You then take part in doing your part to reduce pollution in the environment.
To summarize, necessities are requirements that are necessary for your survival or to preserve your existing lifestyle, in the current scenario or in the future (e.g. retirement planning). Wants are non-essential items that would improve your quality of life, from your perspective. Needs and wants are not mutually exclusive or diametrically opposite concepts. They are simply different from one another and should be handled accordingly. This article should enable you to identify your ‘Needs’ and ‘Wants’ and strike a nice, healthy balance between them to work more efficiently towards financial freedom.
No matter how wealthy you are, you can’t always have it all. However, by balancing your wants and needs, you can make your money last longer and work harder for you.
Want to understand your customized Needs and Wants? Here is a FREE Personal Finance Toolkit that you can download. Once you have done this, you can also schedule a FREE 1:1 call to discuss and get some suggestions.
Thank you for taking the time to read.