When it comes to ensuring financial stability and building wealth, one of the fundamental concepts that you must understand is the difference between needs and wants.
Needs and Wants are economics and psychology concepts that help us understand human behaviour and decision-making. While it is often used interchangeably, this differentiation holds the key to prudent financial decision-making, self-control, and ultimately, building wealth.
Let’s start with a brief definition of the two:
What are Needs?
Needs are the basic necessities of life that are essential for survival and well-being.
These are the things that are necessary for maintaining a healthy and productive life. Needs are universal and include things like food, shelter, clothing, healthcare, and education.
Without these needs, a person’s physical and psychological well-being are at risk. For life to continue and to provide a certain amount of comfort and security, these needs must be met.
In the context of personal finance, meeting needs is non-negotiable and it comes first.
What are Wants?
Wants are desires that go beyond the necessities required for living.
They are shaped by an individual’s preference, culture or environment. Although you can live without satisfying these wants, they include things or activities that improve our quality of life.
Wants can include a new car, a designer wardrobe, a luxurious vacation, the latest smartphone, or eating at a fancy restaurant.
Differences Between Needs and Wants
| # | Needs | Wants |
| 1 | They are basic requirements for survival. | They are an individual’s desire not essential for survival. |
| 2 | They do not change over time | They change over time |
| 3 | Limited in nature | Unlimited in nature |
| 4 | Needs are constant for every person | Wants may vary for everyone |
| 5 | If unfulfilled, can cause adverse effects such as illness or even death | If unfulfilled, may lead to disappointment |
Why you should know the difference between Needs and Wants
1. Budgeting
Budgeting is a key component of personal finance. By identifying and categorizing expenses into needs and wants, you can set guidelines for budgeting your money more efficiently.
For example, you can create a budget for the week that includes buying foodstuff and seeing a movie at the cinema. Seeing a movie represents a want and buying foodstuff is a need. This classification helps you to know how much to allocate to each.
Understanding the difference between needs and wants can also help you prioritize your spending, and make rational financial decisions. This way, you can ensure that essential needs are met first while discretion is allowed on wants within reasonable limits.
Distinguishing between needs and wants is pivotal in personal finance because it sets the stage for allocating resources wisely.
2. Debt Management
Properly differentiating between needs and wants also plays a crucial role in managing debt. Taking on debt to fulfil desires can lead to financial stress and instability.
On the other hand, using funds responsibly for needs such as education or housing can be a strategic decision that improves your financial future.
When you prioritize your needs and avoid accumulating unnecessary debt for wants, you reduce the financial burden of high-interest loans. This gives you room to save and invest, speeding up your wealth-building process.
3. Emergency Fund
Having to make need-based decisions further emphasizes the importance of having an emergency fund. An emergency fund is one reserved for unexpected expenses related to needs, such as medical bills or car repairs.
When faced with an unforeseen circumstance, having such a fund can help you avoid going into debt. This way, you protect your long-term financial goals.
4. Long-Term Financial Goals
Because you have long-term financial goals, you will prioritize your needs over wants. When you do prioritize them and limit overspending on wants, you can save and invest more effectively.
This, in turn, ensures progress towards goals like owning a home, saving towards retirement, or financial independence.
5. Self Control
Self-control is the ability to resist impulsive or unnecessary spending and make wise financial decisions.
With a clear understanding of expenses that fall in the category of needs and wants, you can set priorities, adhere to a budget, and avoid unnecessary debts. This puts you in a better position to make informed and disciplined choices about your spending habits.
Conclusion
Distinguishing between needs and wants is an essential skill in personal finance that has a profound impact on financial well-being and quality of life. It forms the basis for budgeting, self-control, debt management, and the pursuit of long-term financial goals.
In a society where we are constantly bombarded with marketing and social pressure to fulfil our wants, mastering this skill is a powerful tool for achieving financial security, freedom, and peace of mind.
To ensure you do not fall for this pressure,
create a plan and start saving on Cowrywise.
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