Personal Finance 

Finances in 55 Seconds: Needs vs. Wants

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One of the fundamental concepts of personal finance is understanding the difference between needs and wants. Being able to make this distinction is key to financial success. You should be able to identify needs and wants, and then make decisions about your finances based on what is truly needed, and what is merely wanted.

Before you can find financial success, it is vital that you take control of your money, rather than letting it control you. The first step toward doing that is learning the difference between needs and wants. If you have 55 seconds, you can figure out what constitutes needs and what constitutes wants.

  1. List your expenses: Create a list of your expenses. Either write them out, or use your personal finance software to create a list for you. (23 seconds to write them down, 5 seconds to have the personal finance software list them)
  2. Honestly evaluate the list: Skim over the list, and honestly evaluate which expenses are needs, and which are wants. As you go over the list, keep in mind that needs include food, shelter, clothing and transportation to a job. Everything else is basically a want. (32 seconds; if you used computer finance software, you are done in much less than 55 seconds)

Of course, now that you have identified which items in your list are needs, and which are wants, some harder, more time consuming work is warranted. Look at your needs. Even though you need clothing, do you need expensive clothing? Or so much of it? Consider your grocery bill. Can you cut back? Are you spending part of your budget on junk food? Keep in mind, too, that even though eating out constitutes food, you don’t need to spend money eating food from restaurants.

Prioritize Your Spending

Once you have identified your wants, you can work on cutting back on those items to make a little more breathing room in your budget. You can better get an idea of which items to cut from your budget by prioritizing your list. Take care of your true needs first, and then take care of items of great importance to you. If you want to save for retirement, that should be taken care of before going to the movies. Consider what you value, from providing music lessons for your kids, to donating to charity, to building up your emergency fund, to saving for a vacation.

The exercise of identifying needs and wants should get you thinking about what’s really important to you, and what you really want to use your money on. After prioritizing your list according to needs and wants, and then deciding which wants are most important, you can begin to change your spending habits to reflect your priorities. List expenses in order from most important (starting with needs) to least important. Then, when you need to make a spending decision, cutting back during the month means forgoing the items on the bottom of your list, and working your way up.

What do you think? How do you decide which expenses to cut back on when the budget is tight?

{ 6 comments, please add your thoughts now! }

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6 Responses to “Finances in 55 Seconds: Needs vs. Wants”

  1. Jeff says:

    I have learned something in the last few years about “judging” how people define their wants. For some reason, I lumped everyone’s wants in one bucket (cable, vacations, cell phone plans and the like). Anyone that goes out of the box too far, I started thinking that my wants were better than theirs. For instance, I have a friend that donates money to his college alma mater so that they can spend an exorbitant amount on football season tickets. I kind of looked down on him for blowing his money that way. Strange, I know.

    However in the last few years, I have started working with people that are in different places in life than I. Needless to say, I have had my eyes opened to how different things are monetarily more wanted than others. One of my co-workers is in his 40s and spends $100 – $200 on video games each month. What I failed to take into consideration is that he does not do much other than play video games and work. Others I work with play in bands and they spend a ton on instruments and studio time. While that would also sound strange to me, it works for them.

    Then, I took a look at my wants and found that we spend a bunch on books, eating out and vacations. Those are definitely not something that my friends and co-workers would choose.

    Just my thoughts on my “judging” when it comes to wants.

    • Miranda says:

      I agree that you shouldn’t think that your wants are better than others’. It’s up to you to decide what you want to do. As long as you have the money to do it without becoming a slave to debt, I say go for it! But you should always know what you need to cut out — just in case you have to make those choices.

  2. Shirley says:

    When the budget is tight and we have to separate wants from needs, I simply ask, “What will happen if you don’t get or have this?” That answer usually categorizes the item without much doubt and it often reorganizes priorities. 😉

  3. Strebkr says:

    Needs vs wants has changed greatly in the past decade. Ask people today if they think their iPhone is a need or a want.

    I’m not judging here. I would probably keep my phone!

  4. skylog says:

    very fair point. i think, given how life is these days, perhaps “aPhone” is a need, but it certainly could just be a run-of-the-mill cell phone.

  5. The Frugalist says:

    Exactly, everyone’s life is different: and who’s to say that the people writing these articles have happy relationships with everyone around them. What would he say to someone who is collecting trash to build the next big thing. What about making a bad investment. one might agree with the choice and another may call you a fool. What about collectors, are they all wasteful too? It’s an age old hobby. Then you save, or invest and something happens to that money, and you get blamed anyway– remember what recently happened to 401K’s and house values?

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