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.
- 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)
- 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?