Needs vs Wants : The Effect on Your Financial
The era of social media saw various emerging trends, including YOLO and FOMO, which have caused many to live beyond their means.
The desire to be like the influencer they followed or an obsession to flaunt a luxury lifestyle makes them forget that the basis of wise financial management is to spend within their means.
The focus on their 'wants' leads them to live 'paycheck to paycheck' without any means to build an emergency fund, let alone to own an asset.
It is okay to spend, but to ensure that the spending does not drag you into the debt trap, you must know and follow a particular guide.
The first thing you must understand is how to distinguish between needs and wants. If you are able to deal with your needs and wants wisely, it is not impossible that one day, you can achieve your long-term financial goals, such as building savings and owning a house.
What is Needs?
Necessities are essential expenses required for survival and comfort of life. Among them include:
1. Basic expenses for living, such as housing, utilities, and basic goods
2. Transportation: Costs required to go to work, school, and other necessary places
3. Health: Medical expenses, insurance, treatment
Usually, things involving needs cannot be set aside because failure to fulfill them may cause you to live in misery.
What is Wants?
Desire is spending to improve the quality of life, but not essential for survival. Among them include:
1. Entertainment: Watching movies, eating at fancy restaurants and vacations
2. Improved goods: Designer clothes, luxury cars, latest gadgets
3. Facilities: Subscription to streaming facilities, gym membership and premium app
4. Impulsive buying: Non-essential items bought on a whim
The wants will provides happiness but is not essential for survival. Managing our wants wisely is very important, so we only spend within our means.
Effects of Failing to Manage Wants
i. Overwhelmed by debt: Failure to manage wants has caused many to bear excessive debt and end up trapped in a cycle of debt that is difficult to settle.
ii. No investment, savings, and long-term assets: They fail to invest and can't afford to buy assets because most of their salary goes towards spending and paying debt.
iii. Investment does not grow: They invest, but their investment did not grow as they kept withdrawing the dividend received to pay for their wants.
Easy Ways to Balance Needs and Wants
1. Monitor expenses: Create a budget by identifying all expenses to track where you spent your money. If most of your money goes towards wants, it is time for you to reevaluate your lifestyle and refocus on your priorities.
2. Evaluation before shopping: Always evaluate carefully if the goods or facilities you want to buy are more in the form of wants. Giving yourself 2-3 days to process your wishes and assess your financial situation will help you make a purchase decision that is more accurate and not based solely on impulse.
3. Invest first before spending: For example, set aside 10% of salary for investment in ASB, 60% for needs 30% for wants. Spend only with the money you have on hand and do not withdraw money invested. With this simple method, you can live comfortably and, at the same time, you can invest to build your emergency fund.
To ensure a stable and secure financial future, it’s crucial to prioritize needs first, creating a solid foundation. Once needs are covered, a balance between wants and savings will let you enjoy life’s luxuries without compromising your financial health.
Highlights
i. If you manage your wants wisely, your financial position will improve because you have a surplus to invest and build savings.
ii. With savings, you will always have financial resources when needed, you can buy assets and build wealth, and most importantly, you can live peacefully without burdensome debt.
iii. Understand the difference between needs and wants and spend wisely so that you can invest.
iv. Don't ever take out dividends solely to buy your wants as it will hinder your investment from growing