Managing needs and wants

ONE of the biggest personal finance challenges is dealing with needs and wants. Both are part of life. The difference though can be quite blurry in many cases. The difference can vary across individuals and across families. A need for one person can just be a want for another person. In this regard, it is worthwhile to consider the general description of both needs and wants. Developing a framework within the context of money management can hopefully help address these items in an effective and efficient manner.

What is a need? In its purest form, a need is anything that supports basic human survival. Food, clothing and shelter are the popular and common basic needs. These are things that can be considered as “musts” or “essentials.” Many needs usually exhibit a recurring pattern over a considerable time period. In the modern context, needs can go beyond the common basic needs. Expanded needs can include utilities, transportation, health and insurance expenditures. Needs usually take a big chunk of personal income.

What is a want? It is anything that is nice to have and not that critical in terms of supporting basic human survival. Wants are often associated with more pleasant living. Life can be less enjoyable but will still go on even without wants. Needs can eventually become wants. Upgraded food, clothing or shelter are examples. Other examples of wants can include upgraded lifestyle assets and expenditures. Can people live without wants? No. That is impossible. Thus, a framework is needed to balance needs and wants.

As a first step, a written listing of all cash outflows must be done. It would be beneficial if the listing of items will be as detailed as possible. Once this is done, similar items can be grouped under common categories. Category examples can take the form of operational categories like food, shelter, clothing, grocery, telecommunication and transportation. Category examples can also take the form of financial categories like taxes, insurance payments, financial investment payments and even loan payments.

Once the items are grouped into the common categories, the next exercise would be to classify the items into either being a need or being a want. The right split between needs and wants can be anchored on the financial goal and personal values of a person. With this, the platform to manage the items will be the personal budget. A personal budget is a tool that should be aligned with the key priorities of the individual. Priorities are given the corresponding allocation. The 50-30-20 budget model can be a good starting guide.

Everything starts with personal income. We cannot spend what we do not have. If we live beyond our means or spend more than what we earn, we might end up experiencing the debt trap. The first thing that can be done is to allocate 20 percent of personal income to savings and investments. These are very important since a universal goal is to eventually achieve financial freedom. Preparations in the present time are vital to support a better financial future. We must save and invest before we spend on our needs and wants.

In budgeting, needs must be prioritized over wants. Hence, 50 percent of personal income can be allocated to needs. The costs of needs can be managed through more prudent consumption and conservation. Surveying for stores with the best mix of quality and price can go a long way in lowering costs. Meanwhile, the remaining 30 percent of personal income can then be allocated to wants. There might be certain wants that can even be removed completely especially if they are deemed to really be impractical or exorbitant.

Needs and wants are realities in life. Cognizance of the main financial goal and personal values of a person can help make the distinction between needs and wants easier. Managing needs and wants through proper budgeting leads to a sustainable way of life that is key in achieving a bright financial future.

Gemmy Lontoc is a Registered Financial Planner of RFP Philippines. To learn more about personal financial planning, attend the 75th RFP program in April 2019.

To inquire, e-mail info@rfp.ph or text <name><e-mail> <RFP> at 0917-9689774.