Needs vs Wants

Needs vs Wants

It's important to note while cutting back on spending is good, there are some things you should not cut back on, just like you should not cut out all food and eat nothing on a diet. There are Needs and Wants. When it comes to anything in life it is easier to do nothing than it is to do something. Not taking a vacation is easy, we do it all the time. Not buying a luxury car, super easy because these are large wants. Wants can be avoided, but Needs, need to be taken care of. Wants can be put off and neglected which of course can save money. If we give into every impulse to spend we would be in rough financial shape. You may even say, well when I am making more, then I can buy whatever I want. False, according to CNBC 50% of those making more than $100,000 a year are still living paycheck to paycheck. This is called Lifestyle Creep. It is important to try and live minimally and do less in order to save. Keeping your appétit in check.

It is easier to do nothing, than it is to do something

Lifestyle Creep

This is when desires grow with your income. Grow your income from $40,000 to $50,000 and then slowly start to spend additional $10,000 a year. There are many reasons why Lifestyle Creep happens, from social expectations, older age and feeling like you deserve nicer things, wanting to reward yourself for hard work. It is natural and normal to have lifestyle creep, but once again, a budget is a great way to overcome this phenomenon. When growing your income by $10,000 spend only an additional $5000 or better yet, just keep your budget all within %. Grow your income by $10,000, great you are now saving 20% more ($2,000), 50% to Needs ($5,000) and 30% to Wants ($3,000). By keeping your budget % based it is impossible to succumb to Lifestyle Creep.

Needs

Needs you can think of like Maslow's Hierarchy Of Needs. or at least the Physiological needs. You need to pay your rent or mortgage or you will be homeless. You need to buy food or you will starve. You need water, electricity, clothing etc. These are non-negotiable. No matter how much you want to cut costs and save money you have to spend money on Needs. This is the cost of existence. As long as you are alive you will be paying for them. Luckily there are some things you can do to lower the cost of Needs. Lowering the cost of housing by moving to a smaller house or just renting a room. Save money on water by using a rain barrel or take less showers. Invest in high efficiency light bulbs or solar panels to reduce your electricity bill.

Wants

Wants are things that you do not need to survive. Things like eating out, Starbucks. designer clothing, buying the latest iPhone, trading in your car each year for the newest model. Even Netflix and Disney Plus would technically be Wants. Anything extra in your life that does not fit your physiological needs. When I talk about cutting back on spending it is the wants that need to be cut. It is easy to do mental gymnastics on items to frame it in your mind from a Want to a Need. Like a new mattress. Everyone needs a good night's rest, especially since you spend 8 hours a day in bed. It would be easy to justify that purchase. Going along with this example I would ask if the current mattress is not currently functioning, could you buy used and then could you buy on sale or have you done your research because mattress pricing can really vary. But that mattress could easily flip from a want to a need. I recommend looking over your past months expenses and sort them into Needs and Wants so that you can get a good picture of how your spending is currently being sorted.

Recurring Monthly Bills (RMB)

Bills that hit you every month eat right into your net savings as there is no decision making in the month that can save you from the bill. If you want to cut back on eating out you can simply eat out less but a recurring monthly bill is inescapable. Netflix, Spotify, Disney Plus, Amazon Prime, Audible, even car insurance and phone bills are all examples of recurring monthly bills. These are automatically billed straight from your checking or to your credit card which makes it easy to lose track of them. It is best to periodically check subscriptions to make sure they are being fully utilized or if it's possible to lower the cost of a bill. Companies will sometimes lower the cost of your bill if you call to complain. Internet and phone companies are classic examples of this and could save you hundreds a year with just a phone call every 6 months to a year threatening to switch companies. Some companies have long contracts that will just go month to month once they are up, it is best to keep track of those so you can cancel or at least get a reduced rate by threatening to leave. Having minimal recurring monthly bills will greatly increase your ability to save since you will have a larger pool of funds that you will be pulling from. For example:

Monthly
Income	$2,000
Needs	$800
Monthly Recurring Bills	$200
Total With	$1,000
Total Without	$1,200

The total potential savings is greater since fixed expenses are lowered by $200 (in the example). Wants are variable costs meaning they don't need to happen each month. You may buy a new kitchen table one month but that doesn't mean you will be buying a new table each and every month. Having lower RMB or fixed cost gives you greater flexibility when it comes to spending on your Wants or simply saving since there is extra money ($200 in the example) to go around.

Saving Potential

After identifying Needs vs Wants and lowering your Needs (fixed cost) as much as possible you can begin to calculate your full potential savings. For example:

Monthly
Income	$2,000
Needs	$800
Wants	$1,000
Savings	$200
Total Potential Savings	$1,200

This can be helpful to calculate the amount of time it will take to save for a temporary goal like a trip or paying off debt. For example:

Debt	$50,000
Potential Monthly Savings	$1,200
Months until Debt is Paid Off	41.7
Years	3.47

Now living on just basic needs only for three and a half years is quite extreme but at least you now have a ballpark figure of the timeline and can give you a light at the end of the tunnel so you don't lose hope on your goal. The spreadsheet can be adjusted to more realistic figures like only cutting Wants in half to $500 so that the budget will be easier to stick with. But it is important to note that by lowering the pain of the budget ($1000 Wants to $500 Wants) you increase the length of pain. For example:

Debt	$50,000
Savings	$700
Months until Debt is Paid Off	71.4
Years	6.0

By lowering Wants to $500 from $1000 the budget becomes easier and less painful month to month but it increases the duration by 2.5 years. Ultimately it is up to your personal discretion of how much of your Wants you can suppress as a budget you create but don't stick too is useless. Saving money is a skill and just like any skill it takes time to learn and master. Creating a budget and a Wants vs Needs list is a great way to start. If you fail to plan, you plan to fail as they say.

If you found this helpful and would like help budgeting or investing please email me at TaylorMckeeCoaching@gmail.com