Understanding financial needs vs. wants
“You can’t always get want you to want, but if you try sometimes, you just might find, you get what you need.” – The Rolling Stones
In last week’s post about creating a Money Management System, I mentioned JD Roth’s model for dividing your net income into 50% for Needs, 30% for Wants and 20% for Savings. I had a couple of conversations this week with friends who made comments along the lines of “I wish my ‘needs’ only accounted for 50% of my net income!” It got me thinking that, while it’s fairly easy to identify in general terms what constitutes financial needs, those basic needs of housing, food, and transportation aren’t quite as basic as they used to be as our society has become more materialistic. Taking a fresh look at how necessary those expenses that we classify as financial needs truly are can be an enlightening and empowering way to reduce your expenses and redirect your hard-earned money into working a little harder for you.
All we truly need is a clean, safe place to call home. Homeownership is often perceived as a sign of prosperity and financial maturity but for many people, the costs associated with living the dream of homeownership consume a bigger portion of their monthly income than they would like. While what we need is a clean, safe place to live, what we want is as much house as our approved financing allows! The drive to buy something big and beautiful and the temptation to furnish that big beautiful new house with an abundance of furniture and appliances (often conveniently financed with nothing down, not even the taxes, and nothing to pay for 18 months) can often leave us staggering under the weight of much larger bills than we anticipated. Buying a house at a lower price that costs less to run and maintain means that you’ll have more money to commit to savings or fun or to pay off your mortgage early.
Food is definitely a necessity. We need food to survive but there is a world of difference between the cost of regular-sized, healthy meals eaten at home and the oversized portions of fast, convenient food eaten on the run or in a restaurant. For many families, food is a significant part of the weekly expenses but often we spend almost as much on fast food and eating out as we do on groceries. Picking up lunch every day instead of bringing food from home, the convenience of eating out and the drive-thru as well as simply being too tired or busy to cook after a long day all add up not only to an inflated food bill but also to unintentional weight gain. Choosing to create meals with appropriate portion sizes and healthy ingredients will not only make you feel healthier it also has the potential to significantly reduce your monthly food bills.
My Dad has three criteria when it comes to cars. They need to be reliable, economical and paid for. His refusal to “rent” a car through a monthly car payment is a financial habit that has rubbed off on me. (I drive a 1998 BMW318i that I bought two years ago for $3000 – she’s pretty, has a sunroof and leather seats, is great on gas and doesn’t cost me much to maintain). I don’t mind driving a used vehicle but now that financing a new vehicle is so easy and so many people drive newer cars it seems that life without a car payment has become the exception rather than the rule. If you have a car payment, why not consider keeping your car for a few years once the payments are finished? I made this suggestion to clients I met with a couple of months ago who have always driven newer vehicles and have combined monthly car payments of over $700/month. We calculated that choosing to drive the cars for 3-5 years after the payments were finished rather than trading them in for newer models and redirecting the car payment funds into savings could allow them to save over $43,000. When faced with the choice of driving a new car or having $43,000 the idea of driving an older vehicle suddenly became much more appealing! There are other ways to save on transportation costs too; driving a more economical car, increasing the deductible on your car insurance, carpooling or taking advantage of the free street parking that’s a five-minute walk from the office rather than paying to park in the lot right next door. Often the simple strategies that save you a few dollars each month are the ones that have the greatest impact.
Related article: Is 0% financing really a good deal?
Do you have strategies for saving money on “necessities”? Have you redefined what’s truly important in order to meet a financial goal or create a new financial habit? Do we spend too much on “stuff” or should we take full advantage of the fact that we live in a society where we have access to the luxuries that are supposed to make life extra happy? I’d love to know what you think!