Achieving financial security is greatly dependent on our ability to make wise choices when it comes to spending money. Spending, not earning, is the key to financial security (though both are important, of course). And yet we live in a society where over-spending is almost the norm. The result for many people is a pile of debt and all the nasty struggles associated with it. It's certainly not the pathway to financial security.
IMO much of the over-spending in America stems from the fact that we've simply forgotten the difference between a need and a want. So I'd like to review the two and give some suggestions on how people with spending problems may be able to get a reign on their money.
Here are the most basic definitions of a want and a need:
- Need: something you must have to survive.
- Want: something you would like to have.
A ‘need’ is something that you must have to survive. This includes a roof over your head, nutritious food to eat and clean water to drink, clothes to wear that allow you to be dressed appropriately and keep you warm in cold weather, health care and transportation.
A ‘want’ is something that would be nice to have; that you have formed an emotional attachment to having but that you could survive without.
Let's review a few examples to clarify the definitions.
- Need: Clothing. Simple, basic clothing, nothing fancy. It doesn't even need to be new. It only needs to fulfill its purpose of keeping us warm/protected from the elements and cover our bodies appropriately. Example: a simple shirt from Walmart or a thrift shop for $15 (at the most).
- Want: Top-of-the-line clothes by industry-leading designers. Always purchased new. Style is as important, if not more so, than function. Example: Neiman-Marcus Dolce & Gabbana Floral-Print Sport Shirt. Cost: $595. (Yep, I looked it up online.)
- Need: A car to get to work (assuming there's no other form of transportation.) Most likely a used car. As long as it's in good working condition, it's fine. Cost would vary based on miles, but let's go with a respectable $5,000.
- Want: A new, imported sports cars from a premium auto manufacturer. Costs vary as well, but would be well over $50,000 or so.
- Need: A place to live. Could be an apartment, a small house, or even a room in a friend's place. Cost would be on the low end of what others spend.
- Want: A 3,000-square foot custom-built home that has the latest upgrades available and two or more bedrooms than you have people in your home. A pool is a must too. Oh, and it needs to be on a lake. Cost is as high as is affordable -- as long as both spouses keep working to afford the maxed-out monthly payments.
Before some of you blow a gasket, let me give a few clarifying thoughts:
- These are extreme examples at different ends of the spectrum to provide an illustration. Don't get all wacky on me (or feel content with your spending for that matter) simply because you see the "wants" listed above as being extravagant.
- Most of us will be closer to the needs on the list. For example, I need a polo shirt for work ($20) but I prefer a Nike golf shirt instead ($35). Yes, it's more than I need and therefore is classified as a want, but it's well below the high-end $600 shirt. This is the area most of us operate in and it's fine -- as long as all of our spending decisions don't become a series of ever-increasing wants with higher and higher costs.
- I'm not trying to be a kill-joy. You're earned your money and you have the right to spend it how you like. And there's a lot to be said for enjoying the fruits of your labor. So go ahead, live it up. You deserve it and personally, I'm fine with that -- it's what I do. I spend much more than needed in select areas. I live it up in certain areas and with certain purchases while being thrifty in other areas. It's this balance that I think works the best for most of us and it's what I recommend.
Now that we've got that out of the way, let's address those who may have a hard time seeing a want as a want -- they see it as a need. They HAVE to have that designer shirt, the new sports car, and the huge house. Yes, it's killing their finances, but they can make any progress. There's simply no question in their minds -- they have to have what they have to have.
So how do you change poor spending habits of a lifetime? Here are some great tips to work out needs from wants and curb unnecessary spending:
- Change your attitude toward spending. Determine your priorities in life; work out what is really important to you and make a list. Keep this list handy so you can refer to it frequently. When you are shopping and you are tempted to buy, ask yourself “Is it in line with my pre-determined priorities?” and “If I buy this, will it prevent me having money for my priorities?”
- Consider before you buy. Before you make any purchase, ask yourself “Do I really need it? Can I survive without it?”, “Do I have something at home that can do the same job?”, and “Is there a cheaper alternative that will achieve a similar result?” Many times the answers to these questions will halt spending immediately.
- Avoid impulse buying. Stop and think before handing over your money. Walk away while you consider your spending options. This strategy is a great way to help you determine your ‘wants’ from your ‘needs’.
So, does all this mean that you should only ever buy things that you need? Certainly not! It is OK, even beneficial, to treat yourself to something you really want; the secret is to do so with your eyes wide open and only when you can really afford to. Understanding the difference between your wants and needs will help you make wise spending decisions. This is important because the small spending decisions you make now, will positively impact your financial security well into your future.