For some, being able to discern wants from needs plays a critical role in becoming financially independent; for others, especially during these difficult and challenging economic times, it can stave off the specter of financial ruin, foreclosure, or bankruptcy. Asking yourself a few simple questions will help you gain mastery of this vitally important money management skill.
Question #1: Where is all my money going?
The old-fashioned way to figure out where your money goes is to make a chart, label it with different categories of spending (i.e. bills, food, gas, clothing, entertainment, etc.), stick it on your refrigerator or some other often-accessed area of your house, and write down everything you spend money on for a predetermined period of time.
A much simpler way is to take your monthly bank statements and itemize your purchases. Use two to three months worth of spending to give you a good average. An even simpler way is to make it automatic. Websites such as mint.com, and yodlee.com can do it for you.
Question #2: What would happen if I didn’t spend money on ________?
Emotions tend to blur the line between needs and wants. It is, therefore, important to eliminate emotion as much as possible when cutting costs. An honest answer to the above question will do just that. For example, “What would happen if I didn’t spend money on the power bill?” would clearly show that paying the power bill is a need. Conversely, “What would happen if I stopped getting weekly manicures?” might elicit a response that could uncover a way to eliminate an unnecessary expense.
Not all answers are as clear-cut as the above examples. It becomes especially critical to eliminate emotion when classifying gray areas. For example, “What would happen if I stopped spending money on my athletic club membership?” An emotional answer would be, “I’d get fat, so it must be a need”; however, an honest answer, devoid of emotion, would be, “I’d have to exercise at home, at the recreation center, or at the park.”
Reclassifying what we thought were needs as wants is tough, but I’d rather work out at home, eat at home, or entertain at home than lose my home.
Question #3 Are there some needs I’m overlooking?
In his business classic, The Seven Habits of Highly Effective People, Stephen R. Covey addresses the confusion between what is urgent and what is needed. Too often, we do the urgent instead of the important. For example, saving for retirement or having an emergency fund is a need. Attending the opening night of the latest Hollywood blockbuster movie may seem urgent, but it’s hardly needed. Things such as saving for retirement, having adequate medical coverage, and maintaining a well stocked pantry full of non-perishable food items may be needs you’re overlooking.
Question #4: Do I have to give up all my wants?
I’d recommend finding ways to reduce the costs of your needs first. For example, we can all agree that paying the power bill is a need, but does the air conditioner need to be set on sixty-four? And we all understand the need of clothing our children, but do they have to be clothed with the most expensive brand name items?
By successfully distinguishing our wants from our needs, we can more effectively take the necessary cost-cutting steps to help us ride out difficult times.