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Home PERSONAL DEVELOPMENT FINANCIAL INTELLIGENCE

Improving Your Personal Financial Health: Part 3

by Temi Alade Mustapha
November 19, 2020
in FINANCIAL INTELLIGENCE
Reading Time: 4min read
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Improving Your Personal Financial Health: Part 3
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Recognize Needs vs. Wants—and Spend Mindfully

I have noticed that a lot of people find it difficult to spend mindfully because they do not know how to really differentiate between needs and wants.One of the largest challenges to creating and managing a personal budget is understanding the difference between needs and wants.Spending money on wants is often the first thing I tell my clients to cut in my budgeting class.

However, the truth about wants spending is much more complicated and (more important to satisfaction) than any needs spending.First, let’s define financial needs and wants.

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Needs: Spending on goods or services required for basic survival without which an individual would die. Needs spending includes basic shelter, food, clothing, healthcare, etc.

Wants: Spending on goods or services that are not necessary for basic survival but that we desire or wish for. Examples of wants spending include dining out, going to the movies with friends, buying brand name vs. generic, etc. Unless you have an unlimited amount of money, it’s in your best interest to be mindful of the difference between “needs” and “wants,” so you can make better spending choices.

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Needs on the other hand are things you have to have in order to survive: food, shelter, healthcare, transportation, a reasonable amount of clothing (many people include savings as a need, whether that’s a set 10% of their income or whatever they can afford to set aside each month). Conversely, wants are things you would like to have but don’t require for survival. It can be challenging to accurately label expenses as either needs or wants, and for many, the line gets blurred between the two.

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When this happens, it can be easy to rationalize away an unnecessary or extravagant purchase by calling it a need. A car is a good example. You need a car to get to work and take the kids to school. You want the luxury edition SUV that costs twice as much as a more practical car (and costs you more in gas). You could try and call the SUV a “need” because you do, in fact, need a car, but it’s still a want.

Any difference in price between a more economical vehicle and the luxury SUV is money that you didn’t have to spend. Your needs should get top priority in your personal budget. Only after your needs have been met should you allocate any discretionary income toward wants. And again, if you do have money left over each week or each month after paying for the things you really need, you don’t have to spend it all.

Let me leave you with four ways to strengthen your spending defense mechanisms:

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  1. Be realistic with your yourselfIt’s very difficult to limit spending to your most basic needs. There are many reasons why the “No-Spend Weekend” or “No-Spend Month” only span short amounts of time. A “No-Spend Year” would feel like a punishment to most people, and not a rewarding experiment that can unleash creative ways for rethinking your budget and spending patterns.One of the biggest mistakes you can make is being too strict with your budget. If your budget is too rigid, you’ll most likely not stick to it. If having a coffee or going out for dinner with a friend is important to you, make it part of your monthly expenses,but keep it reasonable. Stick to your spending plan and make sure your splurges are affordable.
  2. Find the thrill in being frugal and thriftyMany people love the “thrill of the purchase” because they are not asking themselves, “Do I really need this?” before reaching for their credit card. Indeed, the self-inquiry normally comes after the purchase. “Why did I buy this?” Along with feelings of guilt and regret.However, it is totally possible, with a change in perspective, to find a better, longer lasting thrill in being “cheap and cheerful”. For some people, frugality and thriftiness must be learned.
  3. Defer your pleasure purchasesPut things back and take some time to think about it. We often fall in love with particular items in the store. Sales people come over and deploy all sorts of strategies to help us make impulse decisions. “I’m going to shop around a bit. Thanks for showing me this. I might come back for it later” can be a polite way to get out of moments of shopping doubt. Never buy things that you aren’t fully committed to. If you are still thinking about something in a week’s time, maybe it’s meant to be! After a week or so, you may also have made the little sacrifices needed to afford it.
  4. Keep the online shopping to a minimum in order to keep wants in check, be conscious of the society we live in. We are constantly bombarded with online marketing strategies that are designed to prey on our tendency to confuse needs vs. wants. This is especially the case when we are in front of our phones.Yes, online shopping can be dangerous. In two or three clicks you can be buying a brand new pair of shoes you don’t need.What happens if you have to pay for shipping to return them? You might just end up with something that never leaves your closet. Shopping apps? Deadly. Make your purchases an event that you have to plan for. And save for these things to avoid putting them on credit.Start today to create a future you desire.

My upcoming book will open your eyes to so many traps and how to avoid them. However, I hope you got value from today’s episode.

Till I come your way with another tip next week. I remain my humble self, your finance coach.

This post was originally shared in our Facebook Group: Money Mathematician Network

Temi Alade-Mustapha.

Temi Alade Mustapha

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