Why is it important to distinguish wants and needs?

Understanding this difference helps one manage one's finances in a better manner

Viral BhattUpdated: Friday, July 22, 2022, 10:19 PM IST
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Have you ever felt a certain longing while looking at expensive cars, fabulous houses or breath-taking vacation photos on your friends' social media posts? Without a second thought, we start surfing for the best vehicle or vacation spot. Examples like these are a strong source of wants, but are they bad? Before delving into that, we must understand what is a need and why it is important. 

Understanding needs

For an individual, the basic necessities for daily survival are food, clothing, and shelter. However, in reality, that is not the case as these could also turn into wants if not thought about carefully. Categorisation of wants and needs is a subjective matter and can be interchanged depending upon the choices we make.

For example, eating dal-chawal could be a need as it meets the nutritional requirements of the human body. However, a bowl of expensive pasta with a cold drink may be deemed as want as it is unnecessary. A need is a non-negotiable part of our survival as there cannot be life without it. For instance, rent, house loan EMI, grocery bills, electricity, water, etc.

Similarly, while planning personal one's finances, priority must always go to expenses meant for survival, which are needs. Wants can come in later. 

Want and why is it desired?

Wants are mostly luxurious things, which are not essential for daily survival. Wants often claim a large amount of budget. They are desired rather than necessitated by life, and hence could be avoided for better financial planning. For example, travelling for leisure, expensive furniture, dining out in five-star places, and jewellery could be termed as wants rather than needs. Wants create a sense of pride and enhance lifestyle. 

However, sometimes perspective could turn a want into a need. For example, the medical premium might not be a need for many but it is important to secure their future. 

How budgeting helps

Life with all needs and no wants is practically impossible. Therefore, it is important to understand the difference between wants and needs and prioritise. The budgeting principle works just fine while balancing between wants and needs, wherein you can enjoy your life simultaneously while fulfilling your needs. 

The thumb rule of budgeting is controlling expenses. Elizabeth Warren, a Harvard Professor, first established a principle known as 50, 30 20. This principle simply bifurcates your post-tax income into needs, wants, and savings in the percentage of 50, 30 and 20, respectively. In this principle, Warren has specifically defined what are needs, wants, and savings, thus allocating your funds in the most optimum fashion. 

Now that we know what budgeting is, it is important to learn to implement it. The following steps explain the basics of budgeting:

Step 1: Check the monthly salary being credited to your bank account 

Step 2: Multiply the salary by 0.50, 0.30, and 0.20 to ascertain the amount for needs, wants, and savings respectively that could be made from it

Step 3: At the end of the month, check your bank statement and categorise your expenditure as need, want, and saving. 

Step 4: Stick to the plan.

Once you learn how to control and manage your expenditure, make an investment plan. Savings are done with a pre-determined objective in mind and considering inflation, the cost of such an objective is ever increasing. Going by that principle, mere savings will not fulfil the result of such savings, but investing them in proper instruments will certainly help.

The investment could be categorised in the long, medium and short term, depending upon the tenure of investment. From an economic principle perspective, the longer you stay

invested, the better the returns. Thus, the rate of returns is directly proportionate to the tenure of investment. Every financial objective has an inherent time limit within which it needs to be achieved. For example for child education, you may need the corpus at around 16-18 years from the birth of your child. Therefore, investing the money in long-term instruments, such as mutual funds, Public Provident Fund, and National Savings Certificates is recommended. On the contrary, if building an emergency fund is the objective, the short-term route with higher liquidity options must be preferred. 

(Viral Bhatt is Founder of Money Mantra — a personal finance solutions firm)

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