Every single time financial difficulties appear a solution is to reduce what you spend on things you want and just focus on those you need. This helps you to save a lot of money. In many cases it is more than needed to get out of the jam you are in. Unfortunately, distinguishing between what you need and what you want is not an easy thing, although it is paramount for good financial stability.
Let me give you an example
One thing I recently realized is that I am a really heavy Pepsi Twist drinker. I practically drink one bottle every day. This is around $2.3 per day. Let’s do the math for one month and we have $69 spent on Pepsi Twist every single month. It is not much to invest, right? WRONG! This means $828 after 1 year. Using this money for my investments, projects or to cover some needs is a lot better.
I also offered another example in the past in this article: Stop Smoking To Save Money For Business Investments.
Determining The Formula For Wants And Needs
Some financial advisors will tell you various things about this topic and many will actually give you a formula for determining your needs and wants. This is rubbish. There is no such thing. Determining your personal needs and wants is something subjective. For instance, for some people coffee reaches the level of need because they cannot do anything throughout the day without drinking coffee in the morning.
Needs and wants are mostly subjective for the individual.
We should also understand the fact that the difference between wants and needs is so simple at home. When we reach the supermarket everything becomes complicated as our mind struggles to make the final decision. Impulse buying is mainly driven by buying something you want as opposed to something you truly need. If this keeps happening you end up with less money to cover needs.
The two things that have to always be seen as needs are food and shelter, at a basic level. More about this later on.
As we have more money there are other things that start to become needs, like electricity and internet connection when doing work online. When in the supermarket ice cream is food so you can get away with saying it is a need. It is food, right?
Let’s Understand More About Wants And Needs
Let us try to define these two topics:
- Want – A thing you would really like to have
- Need – A thing that you absolutely have to have
Every single month you have an income. That income is divided into expenses and what is left. At the category of Expense we have to include the needs like utility bills, rent and food. We DO NOT HAVE TO include extras like cable TV or diet Pepsi.
Human beings basically need 4 things in order to survive, thus creating our needs:
- Water and food to be in good health
- Basic hygiene and health care products
Basically, everything else is a want, like a bigger home, clothes from big name brands, eating out at a fancy restaurant and that great new car that you love.
Do not make the assumption that the secret to being stable from a financial point of view means you should never buy something that you want. You want to live your life, thus raising your happiness and motivation. Wants should be treats from time to time but only in the event that you can actually afford to spend money on your wants.
One of the best examples of making a bad choice is buying a really fancy car that is really expensive to take care of. When you cannot afford the maintenance costs of a vehicle and you still buy it, your want was not at all justified and it only leads to more stress on the long run.
The Secret To Unlock Financial Stability?
In theory, this is not at all as difficult as it seems. Everything revolves around one big idea:
“You have to know how much money you make and how much you spend every month!”
This practically means you need to start creating a budget plan. That budget plan should list how much money you make. Then, you add expenses that are actually needs (shelter, food and so on). What remains is what has to be divided among:
A part of your budget should be put into investments and you also need to save money in order to be able to deal with unexpected emergencies. Then, what is left is what you use to take care of your wants.
When financial difficulties appear you absolutely need to drastically cut down on expenses associated with wants. All that extra money spent has to instead be used to deal with what problems you have to deal with.
Make A List
Lists are highly effective in practically anything related to financial stability and finances in general. Try to figure out what you spend money on during one month. Simply make a list of everything that you spent money on. Then, at the end of the month you want to label your expenses. What was a need and what was a want? Obviously, you want to be as honest with yourself as possible. This will clearly show you how much money you might be losing during one month as you buy things you do not really need.