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Budgeting Basics: Needs vs. Wants

Courtesy of USAA

Lately I have been getting a lot of questions from members about debt, cash flow management and how to create a workable budget. Since a consistent theme in my responses revolves around distinguishing between members' financial needs and wants, I thought it would be beneficial to differentiate the two.

Let me start by giving you an example from my life. Friday Night Pizza: Need or Want?

Over the years, the Halliwells have created a family tradition of eating pizza on Friday nights. It's grown into such an enjoyable family event that none of us could ever imagine not having pizza on Fridays. My kids and I look forward to eating the pizza and my wife looks forward to not having to plan dinner. It really is a wonderful weekly event that we all look forward to.

However, there is another side to Friday Night Pizza — it's a bit expensive.

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So is this something that we need to do or simply something that we want to do? My kids say need. My wife and I say want. It seems that we're really not all that different from the rest of society.

Sadly though, this is a society that has become great at blurring the line between needs and wants. Successful cash flow management is about separating the two, thoroughly scrutinizing the wants and finding opportunities to cut back spending.

Defining Needs

Believe it or not, the easiest way to identify wants is actually to start with needs. In my definition, needs can be broken into two broad categories: absolutely necessities and near necessities.

Absolute necessities are things that are important for our basic survival. These are things like:

§                            Food

§                            Clothing

§                            Shelter

Near necessities include things like:

§                            Reliable transportation

§                            Insurance coverage (property & casualty, medical, life)

§                            Utilities (electric, gas, water)

§                            Telephone

§                            Personal care expenses

§                            Child care expenses

While these last items are not necessary for survival, they are fairly important for us to function as members of society.

Defining Wants

Virtually everything else falls into the category of wants and could be cut out if necessary.

Additional wants can even be found in my previously identified list of needs. For instance, we need to eat, but we don't need to eat filet mignon every day. We need shelter, but we don't need the most expensive house that lenders will let us buy or landlords will let us rent. Clothing is the same. A designer label on everything is not necessary for survival. So within each of the needs categories, there is almost always room to cut back.

Back to my Friday Night Pizza story. If my family was looking for places to cut back on spending, pizza would certainly be one place to start. My family would be sad and my dad-walks-through-the-door-with-hot-pizza moments of heroics would be gone, but we could survive without it.

Another option would be to change the way we do it. Rather than ordering pizza we could buy frozen pizza for about half the price. Or we could make it ourselves and spend even less. There are multiple ways we could save money here.

Fortunately, we don't have to cut back on this happy family tradition, for now. However, if it ever does come to that, at least we know where it falls on our hierarchy of wants and needs.

Now, am I suggesting that we cut out all of my family's fun — all of our wants? Of course not. That would never work as a long-term solution. The point is to realize that there is a difference between needs and wants, and that many of our wants can be cut out if necessary.

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posted 3.8.11

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