Identifying Needs vs. Wants
Welcome back, everyone, to our Financial Wellness Seminar. We’re still in the throes of practical budgeting, and today, we’re going to discuss an integral part of this process: distinguishing between needs and wants.
Understanding the difference between needs and wants is crucial for successful budgeting. It empowers you to prioritize your spending, save more effectively, and reach your financial goals sooner.
1. What are Needs?
Needs are expenses that are necessary for survival and basic quality of life. These include:
- Housing: This can be your rent or mortgage payments.
- Food and Water: This includes groceries but not restaurant meals or takeouts.
- Healthcare: Health insurance premiums, medications, and out-of-pocket medical costs.
- Basic Clothing: This refers to basic clothing required for daily life and work.
- Transportation: Costs to get to work or other essential places.
For instance, consider John, a young professional living in the city. His basic needs include his apartment rent, utility bills, groceries, basic work clothing, health insurance, and public transportation fare.
2. What are Wants?
Wants, on the other hand, are things that enhance or improve our life but aren’t necessary for our survival or basic quality of life. These might include:
- Eating Out: Restaurant meals, takeout, or coffee shop beverages.
- Entertainment: Movie tickets, concert tickets, streaming subscriptions.
- Non-essential Clothing and Accessories: High-end brand clothes, jewelry, and designer handbags.
- Upgraded Tech or Appliances: The latest smartphone, a high-end blender, and a 4K television.
- Vacations: Travels, hotel stays, and associated costs.
Using John as an example again, his wants might include weekend meals at restaurants, a Netflix subscription, a new pair of designer sneakers, the latest iPhone model, and a summer vacation trip.
3. The Grey Area: Needs or Wants?
Sometimes, the line between a need and a want can blur. For instance, a smartphone might be a need for someone whose job requires them to be constantly connected but want for someone else. Or a car might be a need for someone living in a rural area with limited public transport but a want for someone living in a city with a robust public transport network.
John, for instance, may argue that his gym membership is a need for maintaining his health. While physical fitness is crucial, he could opt for lower-cost or free alternatives, like running in a park or home workouts. So, in this context, his gym membership leans more towards a want.
4. The Importance of Distinguishing Between Needs and Wants
Identifying needs and wants is critical in shaping your budget. It can help you make more informed spending decisions and prioritize your financial goals.
John realized he was spending excessively on wants—eating out, entertainment, and non-essential shopping. By distinguishing between his needs and wants, he was able to revise his spending habits, allocate more money toward his savings, and get closer to his financial goals.
5. The Balance Between Needs and Wants
It’s essential to find a balance between needs and wants. While it’s crucial to meet all your needs and save for future needs, it’s also important for your mental well-being to satisfy some wants. Depriving yourself completely might lead to burnout or binge spending.
John decided to adopt a balanced approach by following the 50/30/20 budgeting rule, where 50% of his income went towards needs, 30% towards wants, and the remaining 20% towards savings and debt repayments.
Distinguishing between needs and wants is a crucial step toward financial wellness. It not only allows you to prioritize your spending but also paves the way to saving more effectively and reaching your financial goals.
Remember, personal finance is personal. It’s about making the best decisions for your individual circumstances. In our next session, we’ll build on this concept further as we delve into building an emergency fund.
Thank you for your attention, and I look forward to seeing you at our next session!