“I need this adorable purse!” “I need to go to Starbucks to get my coffee before we hit the road.” In a consumer driven society, we do a great job at tricking ourselves into thinking that we really need something when in fact, we really don’t. Instead, we justify our purchases and upgrades that we make. Doing so can really stretch our monthly finances. We end up struggling to take care of the actual necessities so we can finance the things that we want.
Distinguishing the difference between our needs vs. our wants is one of the basic fundamentals of personal finance. It’s also the first lesson to go out the window when it comes to making financial decisions. By nature we are social beings and like to be accepted. In return, we buy the latest and greatest things so we can blend in with our peers.
Examples of Needs & Wants
Need = necessity Want = enhances the quality of life
Basic housing Luxury housing
Basic transportation Luxury transportation
Nutritional Food Eating out
Basic clothing Designer clothing
Debt payments Starbucks/Dunkin Donuts coffee
Healthcare The list can go on and on…
Notice on the “needs” list that there is the word basic in front of housing, transportation and clothing, and nutritional in front of food. On the “wants” list we have luxury items. Basic is simply what is sufficient to get through the day. If a 2200 sq ft home has sufficient space for your family then that is really all you need. Do you need the car with all the gizmos and gadgets that will cost you $500 each month, when the car with not as many buttons and a lower payment will get you to point A and point B just fine? Do you need the designer sweater for $75 when the not-as-popular brand will keep you just as warm and stylish?
Here is one fun calculation to consider: a 16 oz latte costs an average of $3.59. That equals to about 22 cents per ounce, which is $28.27 per gallon! We would never pay that much for a gallon of gas! Yet when it comes to our coffee, we have to have it.
There are a couple of exercises that can be done to refocus our priorities each month.
1. Look at your monthly budgets for the last month or two. Have a piece of paper handy or use a spreadsheet with 2 columns labeled: Needs and Wants. Without justifying why you “need” something, place each item into a column. It may take a few times to get the placement right, but eventually you will see that the “wants” column has a whole lot more stuff then the “needs” column. From there, further review your “wants” list to see if there are things you can: cut out, cut back on, or find a less costly alternative to.
2. Keep a log for one day of all of the situations you encounter where wanting/needing comes up and record your thoughts or the outcome. This can help open our eyes to the daily choices we make and how we can improve decision making.
Sometimes, we just need to return back to basics to regain our financial stability.