Budget begins by distinguishing needs vs wants
“I don’t have enough to save”
“My living expenses are too high”
“I don’t earn enough to cover my living expenses”
All too often I’ve heard or seen people complain about their circumstances revolving around income vs expenses or can’t save enough. If I were to dig deep into the root of the issue, I’ll almost certain able to conclude that it is due to the need to be “keeping up to the joneses”, as they say it.
Or simply, just can’t distinguish the difference between Needs VS Wants.
Now, it doesn’t matter which camp you are in. To make this fruitful, I suggest you identify clearly what exactly are your living expenses as of now before you proceed. You may refer to my post here on Passive Income VS Living Expenses and download the template therein to assess your current living expenses.
Maslow’s Hierarchy of Needs
First things first. We’ve all heard of Maslow’s Hierarchy of Needs, yes? It looks something like this.
Basically we all start at the very bottom of the pyramid, which is the most basic needs we look to be fulfilled. Once those are fulfilled, then the next level of needs will be something that we are looking for, all the way up to the top.
If you think about it, the basic needs are like survival need. Psychological needs are more socially driven and it won’t be something you would be pursuing if you’re struggling to survive. Finally the self-fulfillment needs are the highest level as that is what people strive for to achieve the “most out of life” but it can only be done if you don’t need to struggle for the other things under the pyramid.
More details of the article can be read here.
Needs vs Wants
Simply put:
- NEED is something that we require in order to survive
- WANT is something that we desire to have and we may or may not be able to obtain it
Identifying NEEDS vs WANTS
Whilst the definition can be so simple, we sometimes get confused with our needs and wants. Or worse yet, we give in to our wants although we cannot afford it.
At this point, it is probably useful to showcase some examples of needs vs wants.
| NEED | WANT | |
|---|---|---|
| Food | Something to eat to get energy for the day’s work | Fine dining, steak, omakase, brunch cafe, dessert |
| Drink | Water to be hydrated | Coffee, tea, soy bean, fruit juice |
| Shelter | A house to live in | Bangalow, double-storey house, 2k sqft condomimium |
| Phone | A working communication tool with smartphone features | iPhone, Samsung Galaxy Z Flip |
| Clothing | Clothing | Fashion wear, branded clothing |
| Exercise | Any form of exercise | Gym, flycycle |
If you did go through the exercise to list out your monthly expenses and reflect on your choices, you may be able identify some pockets of areas where you can cut on (should you choose to).
In my article on savings strategy, I have suggested to save first then spend later. By identifying the amount we want to save, we are left with a quantified amount that we can spend on.
This is when budgeting comes into play and we will know how much of our “wants” we can indulge in.
Imagine this… When someone tells me they don’t have enough savings, but somehow just bought the latest iPhone which costs RM3,500… See the irony?
50/30/20 Rule
Should you be looking for some guidance on how you should budget for your needs and wants, I’ll suggest to you a popular 50/30/20 rule.
Senator Elizabeth Warren popularised this budgeting rule in her book – All Your Worth: The Ultimate Lifetime Money Plan.
In this, she recommends to divide up our disposable income and allocate it to:
- 50% on needs
- 30% on wants
- 20% on savings
This is a pretty good way to fulfill our needs and give us some room to indulge in our wants whilst ensuring we have enough savings to boot.
Start Budgeting Today
I generally stinge on my own “wants” to save / invest more. I start with savings (minimum 20%), then I will spend the remaining mostly on my needs. IF I have any balance, I’ll either save / invest more, or I’ll indulge in some of my “wants”.
How you do your budgeting is entirely up to you. The key point is that you have a choice and say on the matter. It doesn’t matter how much you earn, it only matters how much you can keep in the end.
Clearly understanding the difference between needs and wants will enable you to make the choices consciously and forever hold your peace.
