I believe that many of the personal finance problems that people face are due to a confusion between wants and needs.
Not long ago, I used to think it was more a matter of a blurry area between wants and needs. I’d use that blurry area to justify some of my purchases - cell phone usage, expensive pens, and so on. These things were “needed” in some way, so I would just define them as needs and not think about them critically.
But what happens when I step back from that for a moment and think about these things with a seriously critical eye?
What do I actually need in life?
I need a roof over my head. Does that mean I need a house as nice as the one we live in? Not really - we could make do with something much smaller and older. Thus, quite honestly, probably half of our mortgage payment is a “need” and half of it is a “want.” The same goes for house insurance.
I need food and water. A majority of my food bill is a “need” - most of my purchases are simply covering staples and buying the basics of food for my family. I’ll also identify my water bill as a “need.”
I need clothing. I’m extremely tight with my clothing - what I do buy is used to directly replace something that’s falling apart, and as we’ve established, I wear clothes until they’re in very bad shape. Even then, when I do buy clothes, I’ll still spend a little above the need.
I need a means to earn a living to pay for the needs. That means at least part of our electric bill is a need, as is our internet bill, as both of these are required for me to write and earn income.
My wife needs a means to earn a living. Thus, our fuel expenses are largely a need, as is car insurance.
I need basic hygiene and health, as does my family. Those areas of spending are largely need-based.
I need to protect my family against my demise. Thus, for me, life insurance and disability insurance are needs.
Everything else is a want.
Part of my mortgage is a “want” because I want a big house. Some of my food bill is a “want” because I like delicious food. Cable? Want. Telephone? Want. Cell phone? Want. Wii? Definitely a want. Other entertainment expenses? Want. A higher-end computer? Want.
When you start looking at the small number of things in your life that are actually needs, you really begin to see how many things you buy simply because you want them, and then you start to realize just how much fat you can really cut.
For example, do I really need both a home telephone and a cell phone, especially if I’m already paying for high speed internet and my computer has a microphone and speakers? Of course not. I could just set up Skype and immediately eliminate the landline, then just get a prepaid cell phone and take care of the mobile bill, too. (My wife and I are actually migrating to this - we’re trying Skype on a trial basis as our primary telephony right now).
What fun is life without wants?
The point isn’t to abandon all of the stuff you want, but to realize how much of your monthly spending is tied to wants. It’s fine and healthy to want things, but when you’re sinking financially just to maintain things that you want, then there’s a real problem.
Try this experiment. Divide all of your spending into needs and wants. Before tallying things up, make a deal with yourself - for every dollar you spend on a want, put a dollar into savings for the future. Then tally things up.
When I did this, I realized that the majority of our spending was on things that were merely things I wanted. Looking at those wants with a more critical eye - eliminating some and putting a bit more focus on the things most important to me - led me to making some cuts in my spending that I might have otherwise just assumed as a given. That’s made a big change in my spending choices - and has put some cash right back in my pocket.
The Simple Dollar chronicles a man's road to recovery from "total financial meltdown." As author Trent Hamm puts it, "The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two." We'll post a couple of entries a week, but you can check out his writing daily at www.thesimpledollar.com