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Money Management,  Money Mindset,  Spending

Needs and Wants – How to Distinguish Between the Two

The trick to investing, saving money, and reaching your financial goals, is to make sure you’re wisely balancing your long-term needs and your short-term wants. This balance will allow you to live well, but frugally, and find joy and contentment in life. Like many things in life, there is no one size fits all formula, and only you can determine which trade-offs you are willing to make.

The difference between needs and wants?

The difference between needs and wants is quite simple:

  • Need: Something you can not live without. Essential items required for life.
  • Want: Something you would like to have. You won’t perish or suffer without it.

Understanding needs vs. wants

Needs will vary, but for most people, it might look something like this:

  • Housing
  • Transportation
  • Insurance
  • Gas and electricity
  • Food
  • Cell Phone
  • Clothing

Wants typically include things such as:

  • Travel
  • Entertainment
  • Designer clothing
  • Gym memberships
  • Eating out at restaurants
  • Netflix and other subscriptions

Everything that goes beyond the basics, such as a big house, designer clothes, expensive dinners, alcohol, and a luxury car, is a want.

The grey area

A large part of smart spending is knowing when to spend the extra money on better quality and when a basic version of a product will suffice.

Most of us need a car for getting to work and back. But needing a car is not justification for financing a new car and getting stuck with a car payment you can’t afford. We all would like a BMW, but a used Honda, paid for in cash will get us where we need to go all the same. Long term, the Honda is also likely to cost less in fuel and maintenance costs.

The $20 pack of triple-ply super soft toilet paper sounds like a smart buy, but could you get by with $8 double-ply rolls? Either way, it’s money down the drain (or toilet as it were).

Learn to identify when its worth spending the extra money on a product, but also keep in mind that more expensive does not always mean better quality.

How to prioritize needs and wants

Does that mean that you should only buy the things that you need? Not at all. Life is meant to be lived, not survived. Treat yourself to some of your wants along the way, but do so only when you can afford to. Be intentional.

So how do you work your wants and needs into your budget? Begin by identifying all the things you buy. That means everything from the pack of toilet paper to health insurance. A tabbed page was created within the “Simple Budget Spreadsheet” to help you list items. Reference this list as you group purchases into broad categories like toiletries, cable, phone and insurance.

A commonly used formula is the 50/30/20 budget. If you distribute your monthly income according to this formula, that means you would spend 50% on needs, 30% on wants and 20% on savings and paying off debt.

Example: Income:$2000/mo – Needs:$1000 / Wants:$600 / Savings and Debt:$400

If your current spending is disproportionate based on the list you made, there’s good news! You can make adjustments!

Move things around – Take a careful look at your categories. Some of the items you’ve indicated as needs may actually be wants, or vice versa.

Trim spending on needs – Review items on your list and find opportunities to save money. Small changes to your auto insurance plan could save you lots of hard earned cash.  Switching your cell phone provider could save you $10 or more a month! Be sure to also inquire into any discounts they may offer.

Trim spending on wants – Shop around! Buy used or shop around for refurbished or open package products. Look online and in stores for sales and discounts. There are always opportunities to save!

Up for a challenge? Eliminate some wants completely!

Keep in mind this concept is designed to be a guideline to help you gain awareness into your spending habits. If you want to adjust your spending so that you spend less and put more money towards saving or investing at the end of everything month, then go right ahead.

Decide on the life you want to live and go for it!

-Derek

Finance Coach, Foodie, Writer and Traveler. When he is not working, he travels(top of the list is Europe) in search of amazing history and to gorge himself on bread products.

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