We have established several times that to build a saving habit, one needs to start budgeting, and a fundamental aspect of budgeting is defining your needs from wants. To create an effective budget that would actively change and improve your saving habits, it is necessary to consider the differences between needs and wants, figure out what parts of your expenses fall into which category and start trimming.
How a person decides on their needs and wants may vary from lifestyle to lifestyle, but a key defining factor to remember is this: a need is an essential requirement or necessity for a person to live and function. In contrast, a want is a desire or something that can improve the quality of life. These two terms might be used interchangeably; however, they are vastly different and pinpointing those differences is important in building better saving habits.
Understanding Needs vs Wants
Needs can be classified into two: Objective or Physical needs and Subjective or Psychological needs. These objective needs are fulfilled through tangible and physical purchases that can be measured. Examples of this are food, clothes, shelter, and water. While subjective needs are the ones that cater to a person’s mental well-being and health, such as self-esteem, a sense of security, and approval. Having needs fulfilled are highly important to the health of a person, both mentally and physically.
Wants are desires. They are things that you want and maybe improve the quality of your life but are not essential to your life, which means that you can do without them, but you would like to have them. Wants are different for individuals, and the level of importance of each one varies as well. They also change frequently. You wanted different things when you were young, and those wants have changed or evolved as an adult. Economics taught us that human wants are unlimited, and people keep seeking various alternatives.
- Needs are necessities, while wants are desires
- Needs are essential to survival, while wants make your life easier but not essential
- Needs do not change over time; however, wants do change from time to time
- Having needs not fulfilled can lead to adverse effects; wants may not
- Most needs are similar for individuals, while wants vary for different people
Separating Needs from Wants
Now, we have the question of how you separate your needs from wants. Sometimes separating these two is pretty simple, depending on the situation or scenario. For instance, where you own a vehicle, it is more of a need to buy fuel rather than focusing on getting a fancy seat cover which would count as a want. That’s clear enough, though certain questions must be answered in more complex cases to arrive at this distinction.
What questions should you ask yourself in determining whether a purchase can be classified as a want or need in cases where they are not obvious. Let’s look at some of these questions.
- Do I really need this item to live and function?
- Is it possible to fill this need less expensively?
- Would I still want to purchase this item in a week, a month, or even a year?
- How would my life be different if this item were not a part of it?
With these questions to determine how to separate the needs from wants, you end up with the following four categories:
- High-priority needs
- High-priority wants
- Low-priority needs
- Low-priority wants
We also recommend using a prioritization technique known as the MoSCoW method, which stands for Must Have, Should Have, Could Have, and Won’t Have. These four categories speak to the high and low-priority needs or wants as highlighted above. It is easier to ask yourself this while making your budget. With this model, one can fully assess their expenses and what category they belong in. Using this method allows you to be fully aware of how you spend your money and in which ways you can cut back to save more.
The products we offer at BizVest are built to help you automate your savings, and we are here to help you on your savings and investments journey. Visit www.bizvest.co and begin today.