You should be able to categorize your needs and wants clearly in order to use your money wisely.
Needs are non-negotiable absolute requirements of your life.
Wants are not necessary but can make you happy. In other words, desire or luxuries.
But it is not always easy to differentiate one from another. This is because there is no universal bifurcation between a need and want. It is always a personal decision & depends on an individual’s financial and lifestyle situation. What is want for one can be a need for someone else.
Buying the latest gaming console to enjoy playing video games is a want for person A. But the same can be a need for person B if he’s a game developer and needs to test his products on the latest technology.
Being a personal decision, the differences between wants and needs blur even further due to the following reasons:
People try to justify their luxury purchases. They rationalize it by saying “I need” this instead of saying “I want” this.
For example, say you have a perfectly functional smartphone. Now a newer model comes along and you WANT it. You will justify its purchase by thinking that the newer model has so many new features that it will make life easier.
- Peer Pressure
More often than not people define their needs not only on what they would like to have but also on what others have. Your surroundings play a big role in deciding your needs and wants.
For example, having a small car can easily fulfil your need. But if a lot of your friends have bigger cars, you will see it as kind of a norm and will end up buying a bigger car (want) instead of a small car (need). If people around you have more than one car, you will convince yourself that you NEED a second car to maintain your social status, when clearly that second car is nothing but a WANT.
It is important to remember that by fooling yourself in believing that a want is a need you are harming no one but yourself. This confusion of wants vs. needs will have a huge impact on your future financial situation.
Being guided by all the latest “must-haves” you will end up spending your hard-earned money on unnecessary things which will lead to debt and stress. Once you become a slave of your wants you will never be satisfied and will always want more.
It is always better to spend money on something that will keep you and your family rich in future, instead of spending it on things that will make you look rich today.
Wants are desires and luxuries which should be treated as such. When you know you are spending on luxury, you can enjoy the same when you can afford it as a reward for your hard work and be happy about it.
Every time you are about to make an expensive purchase ask yourself if it is a need or a want. Let’s say you are single and are about to buy a car. You don’t need a big family sedan, a smaller hatchback will work just fine for you. The hatch is for ₹5 lakhs. The sedan is for ₹9 lakhs. The hatch you can afford from your savings. For the sedan, you’ll have to take a loan and pay interest every month with the instalments.
Let’s say you take a 3-year loan @ 9% for ₹4 lakhs to fulfil your want and buy the sedan. You’ll be paying ₹12,720 every month for 3 years to pay off the principal + interest of ₹4.57 lakhs. At the end of 3 years, you would’ve paid off the loan but the car’s value depreciated so if you were to buy a new car you’ll be back to square one.
Let’s see what would have happened if you had set a financial goal for buying a luxury car & chosen a SIP for that at ₹12,720 per month for 3 years. You would have bought the hatch at ₹5 lakhs & at the end of 3 years, your hatch could be worth ₹2 lakhs – ₹2.5 lakhs. If your mutual fund scheme grew at 15% – 17% p.a. you would have been left with ₹5.8 lakhs – ₹6 lakhs. You are in a much better position. You could buy a new, bigger car from selling the hatch and the money accumulated from your investment. But, let’s say you continue the trend and keep investing ₹12,720 for three more years. Because of the power of compounding you would have around ₹15 lakhs – ₹16 lakhs by investing around ₹9 lakhs – the same price you were willing to pay six years earlier for a C-segment sedan. At the end of six years, you would be in a position to skip a segment altogether & buy a premium D-segment sedan outright from your mutual fund investment!
If you are aware of your wants and need you can achieve financial independence easily. If not, you will be caught in a vicious circle of it.