Within the topic of personal finance, budgeting is the foundation. From our experience, many people have a hard time differentiating between what a need is and what a want is when allocating money towards various things in life. Though it can be a tough concept to grasp, our goal as financial advisors is to help educate our clients and communities so they can make better financial decisions and improve their financial futures. In this blog, we will go over what a want is, what a need is, and how to fit both within a budget.
To start, a need is a necessity of daily living such as clothing, food, water, and shelter. These physiological needs, as American psychologist, Abraham Maslow puts it, are the most basic of needs that must be fulfilled in order to survive. If these needs are not satisfied, we cannot function optimally.
On the other hand, a want is typically an object that can make our lives easier or better. The key difference is that we could still survive without a want. These wants stem from emotional desires. Wants typically include things such as vacations, entertainment, designer clothes, and Starbucks (Yes! Starbucks is a want and not a need).
Of course, there are many purchases that fall into a grey area, so these definitions have limitations. For example, most people need a car to get to work or school, unless they have access to excellent public transportation. The grey area in this is that some people want a luxury car but the need is that of a basic car to get you from point A to point B. A luxury car would be nice to have for the leather seats, a more powerful engine, or expanded cargo space, but cloth seats, a decently powered engine, and an economically spaced interior can still get the job done.
Food is another grey area. You need to eat to stay alive but food costs change depending what you choose to eat. Do you need fresh broccoli to cook for lunch and dinner or would the cheaper option such as frozen broccoli do the trick? Even though we need to eat vegetables to sustain ourselves, do we want to buy the higher priced option? What are the benefits, if any? That is something that you will have to decide for yourself.
After understanding what needs and wants are, as well as the respective grey area that applies, the question is: how can you budget for both? We recommend writing a list of all the things you buy, from bottles of water to life insurance. Then, group the purchases into broad categories such as travel, food, phone, entertainment, and bills. After this, divide the categories into two buckets: needs and wants. In the example of the categories above, we would place bills, food, and phone into the needs category. Travel and entertainment would go into wants. Once done, check back in with your monthly income and make sure you can pay for all your needs. Whatever is left after paying for your needs, can then be used towards savings and some wants.
We hope this blog post helps you with your budget or helps you rethink your approach to your own finances. We know that it can be challenging when it comes to deciding what to spend your hard-earned money on. If you have any questions or need help, reach out to Tori and Alex who can walk you through this exercise and help you build a foundation for financial success.
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