How to Separate Your "Wants" from Your "Needs"
Some needs and wants are easy to distinguish. But other times, you'll need to dive a little deeper to figure out what you can cut and what you really can't live without.
When building your first budget, everyone is going to tell to separate your “needs” from your “wants.” No matter how you plan on using the money you save—whether it’s to pay down your debt or build a hefty nest egg—those extra funds are going to come from cutting down on superfluous costs, not the necessary ones.
But while a lot of your expenses will be easy to categories—rent is a definitely a “need,” while ice cream is undeniably a “want”—some spending areas won’t be so easy. That’s why we spoke to a number of experts to dig into the budgetary nitty gritty and find out just how exactly one goes about separating their “wants” from their “needs.”
This won’t be easy, but it will be helpful.
“Few people really understand how much money they actually spend buying items that they may want when first seeing them—but that aren’t true necessities,” said Timothy G. Wiedman, professor emeritus of Management and Human Resources at Doane University.
“For a great many folks, I’d bet that figure is quite a bit more than they’d ever imagined; and when a credit card is used to finance those unnecessary impulse purchases, the eventual damage is even greater!
William Acheson, CFO of GWG Holdings, Inc. in Minneapolis lamented how making good financial decisions, big and small, has gotten more difficult. “This is despite the proliferation of online and app-based spending, budgeting and investing tools,” he added.
According to Acheson, this increased difficulty was due to two main factors.
- “The amount, intensity and sophistication of highly targeted advertising pushing us to spend more and more (to keep up with others).
- “The vast, and often conflicting, amount of advice and opinions from the ‘experts’ who usually are trying to separate you and your money—see item number one above.”
“The result,” said Acheson, “can often be a disengagement from any form of advice or tools while you chalk it up all to noise and spend merrily ever deeper into debt.”
Getting a firm grip on what spending you should cut back on is a critical first step towards taking control of your financial future. It won’t be easy, but the benefits can’t be denied.
No more purchasing on impulse.
When you have a monthly budget, impulse purchases can throw everything out of whack. And if you’re buying something that can be categorized as a “splurge,” that pretty much tells you right there that it’s a “want,” not a “need.”
But cutting out impulse spending is easier said than done. So what can you do to keep those excess items out of your shopping cart? Here’s Wiedman with a very simple solution:
“I often used to fritter money away by making unnecessary impulse purchases, but I found a prevention strategy that has worked well for me.
“Before buying anything beyond my basic, everyday necessities (especially if an item is ‘pricey’), I put off the purchase decision long enough to ‘sleep on it.’ Then, after a day or two, I make a quick mental list of the pros and cons related to that particular purchase.
“Sometimes purchasing that item still seems reasonable, and I’ll shop around to find the best deal available. But, on the other hand, if buying that product hardly makes much sense at all, I’ll skip that purchase entirely.”
Does it need to be replaced?
Sometimes, a thing will break and you’ll definitely need to replace it. That’s a need. But with other items—ones that are still working fine, but are a little outdated or worse for wear—the line between “want” and “need” gets a little bit blurrier.
“In our modern society, we are quick to buy new because we’re constantly fed the information on the ‘latest and greatest.’” observed Shane Walker, executive VP and CMO at ProActive FinTech LLC.
But, even if an item breaks and needs to be replaced, there are larger principles at work that are likely hitting you right where it hurts: the bank account.
“As sad as it is, we also live with the reality that companies no longer design products to last,” said Walker. “Things are made to wear out or break down so we are forced to buy again. Unlike years ago, when products were made to last for years, we are faced monthly with needing to replace items.”
Even so, you need to think long and hard before spending to replace an expensive item that works fine but isn’t the newest, most fashionable item. Walker also noted that buying better-quality, longer-lasting items might cost you a little more in the short term but will save you money overall.
Follow the Rule of Eight.
There’s a flipside to buying nicer, more durable items over cheaper ones: Past a certain point, high-end products aren’t that much better than the middle-range ones. If you’re constantly buying the most expensive products out there, you’re adding a whole bunch of costly “want” on top of a basic “need.”
To combat this phenomenon and help people manage their money more effectively, Acheson has a simple system called the “Rule of Eight” that he believes leads to better and more informed spending choices across the board. Here’s how described it:
“The Rule of Eight has two components. First is the quality component. The Rule of Eight says that you get what you pay for any good with the quality of rating between one and eight on a 10-point scale.
“In other words, once the quality (you can substitute the word ‘luxury’ here) exceeds eight on the 10-point scale, the price rises very rapidly yet the usefulness of the item (economists call this the “utility” of the item) barely changes at all.
“An example from the household is that a GE Profile Range (seven or eight out of ten) has virtually the same utility as a luxury brand such as Wolf but at a fraction of the cost. This rule applies to virtually everything in the world from concert tickets to cars to coffee.
“The second component of the Rule of Eight is quantity. This is an easy one: 80 percent of your purchases should conform to the Rule of Eight. So, only on relatively rare occasions should you be buying nine or 10-points quality of anything.
“Save your 20 percent for those ‘luxury’ items that really matter and really mean something to you. For the rest of your purchases, ‘pretty good’ is more than good enough. Adopt the Rule of Eight into your lifestyle and you may surprise how much money you are wasting on needless ‘luxury.’”
Can you live without it?
Let’s cut to the chase. Something you need is something that you can’t live without. So why not just ask yourself, “Can I live without this?” That’s exactly what Jill, owner of the frugal family living blog Organizational Toast, did—and it worked out great.
“When we became a one-income family we realized very early on that we had to openly and honestly look at what a want vs. a need was. This meant asking the simple question ’Can I live without this?’ Meaning will my life go on without this item,” said Jill.
“If the answer was ‘no’ we asked ourselves what were the most cost-effective options for that item? We did this for everything! From the smallest purchase at the grocery store to large purchases like a family vehicle. This questioning process made us really think about what we were buying and not only curbed our spending on wants but also cut down on impulse buying!”
If you want to make the decision process a little more scientific, Certified Financial Planner R.J. Weiss, founder of the personal finance site The Ways to Wealth, has a solution that might appeal to you. “One way to separate wants from needs is to create a ‘To Buy’ list of items you’re looking to buy,” he said.
“Once you place something on the to buy list, make a note of how many times you would have used that item over the next 30 days. If it is something that will improve your daily quality of life, considering buying it. If you would have just used it once and it wasn’t critical, now you can take a pass.”
Consider cutting back in these four areas.
Some lifestyle areas are more likely to carry waste than others. Jeremy Rose, Director of the U.K. web hosting site CertaHosting suggested four areas of spending that were ripe for cutting back:
“Food, as one of the most frequent and largest monthly expenses, or to be exact, irrational buying of food (which are then not used, buying more types of the same food, accumulating food and the like) are in the first place when it comes to uncontrolled spending, “ he said. “Our actual biological needs differ from the ‘wants’ and indulgences we often do to feel better, not realizing it’s costing us money.”
Beyond food, Rose also suggested cutting back in the following two areas:
“Cable TV: Subscription to cable programs can burden the home budget, especially if we take into account the breadth of the currently available software packages on the market, their prices and their ability to combine.”
“Gym membership: Membership in a gym is one of the costs we are getting into because we think we need it in order to live a certain way. For those who use it occasionally and aren’t active members of the gym, this expenditure is unnecessary.”
Lastly, Rose advocated for staying in—which is usually very inexpensive—over going out, which is usually … not. “The decision to reduce monthly expenses and to cut on the things you really don’t need can be achieved by lowering or quitting altogether eating out,” he said.
However, he made to note that going out, shouldn’t be eliminated entirely “as social contacts play an important role in the private and business world.” He simply meant that habit should be “reduced to an acceptable level.”
This might take some time, so be patient.
With the exception of winning the lottery, there’s nothing you can do overnight to help your finances. Maintaining a budget and trimming your expenses is something that will take time—which means that it will also take patience.
Besides, the longer you track your expenses, the larger the sample size you’ll have to work with and the easier you’ll be able to pick out your own problem areas with money.
“Folks who are having trouble budgeting should track each and every expenditure they make for at least six weeks so that they can see where every bit of their money is going,” advised Wiedman. “At that point, they can begin to assess exactly where unnecessary spending is occurring and then formulate a plan to improve their spending habits.”
To underline his advice, Wiedman cited one of the world’s most famous (and accurate) pieces of financial wisdom: ‘Watch the pennies and the dollars will take care of themselves.’”
Ultimately, the more you plan, the better off you’ll be.
William Acheson, Chief Financial Officer for GWG Holdings, Inc., has more than 25 years of experience in positions of importance for financial services firms around the globe. Prior to joining GWGH in 2014, Mr. Acheson served as Managing Director of Global Structured Finance and Investments at Merrill Lynch in London. Mr. Acheson earned B.S. degree in accounting from the College of St. Thomas in St. Paul, MN, and earned his CPA certificate in 1991.
Jill is the owner and voice of Organizational Toast (@organizationaltoast), a resource for families looking for budgeting and frugal living tips. Her personal experience becoming debt free as a one income family drives the content and resources and provides the tools and insights other families need to successfully manage their finances, reduce their spending and reach their financial goals.
Jeremy Rose has ten years’ experience as a hosting provider and has been running a highly successful telecoms business from the town for 20 years.
Shane Walker is the executive VP & CMO at ProActive FinTech LLC. He gives people better control of their finances by digitizing the successful concept of the envelope system for budgeting. At ProActive Budget, they’ve combined the modern convenience of a debit card with the proven budgeting system of using envelopes. It works because it requires a person to consult their budget before they spend. It changes the behavior of spending money.
After 13 years as a successful operations manager working at two different ‘Fortune 1000’ companies, Dr. Timothy G. Wiedman spent the next 28 years in academia teaching college courses in business, management, human resources, and retirement planning. Dr. Wiedman recently took an early retirement from Doane University (@DoaneUniversity), is a member of the Human Resources Group of West Michigan and continues to do annual volunteer work for the SHRM Foundation. He holds two graduate degrees in business and has completed multiple professional certifications.
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