Difference Between Needs and Wants

The first step in intelligent financial planning is to understand the difference between needs and wants. Your clarity on the subject will also lead you to do better budgeting.

Today’s youth consumerism has unfortunately not only skewed the definition of needs and wants, it has also made the subject take a backseat. Let us revisit the subject with some examples that we ourselves come across in our everyday lives.

The definition

The basic definition of a need is something which you absolutely must have in order to live. That could be  food, shelter and clothing.

Without a need, you will find it very hard to survive. In the personal finance world, obviously our discussion on needs and wants is with reference to things money can buy. These are the same as those future goals you jotted down when you did your goal based investing exercise.

So let us see some examples of what our needs can be.

Needs :

• Education expenses for children
• Basic health care for family
• Clothing for family
• Expenses on food
• Household maintenance expenses like electricity and water

A want is something which you desire to have but without which you can still live. If you don’t lay your hands on a want, you will still survive.

Wants :

• An expensive watch
• A holiday every 3 months
• An expensive car
• A luxurious house

How to segregate them or difference between needs and wants ?

It’s generally advised to scribble all your requirements on a piece of paper – everything you desire to possess.  Let us call this the Master List. Once you have done that, make two headings, one called Needs and another called Wants.

Go through the Master List and put down each and every item either under the Needs or under the Wants headings depending on how you view each item.

When you do this, ask yourself the following questions about each item :

1. What will I lose if I did not buy this ?
2. Is it truly very important to me ?
3. If I delay buying this, will it hurt anyone ?
4. If I avoid buying, will I save money for something better ?

Re-arrange all the items to make sure you have under the Needs heading all the things which you must absolutely have to survive.

In our list above, surely one could do without the expensive watch and an expensive car. Those are wants. However, basic education for your children and household expense are something which you need to spend on, come what may. Those are your needs.

Why do I need to do this ?

You earn money every month to spend on your living expenses and to save for your future. If you have too many wants as your goals, a lot of your monthly pay packet will get used up to procure those wants. That will leave less money for you to save and invest for your future.

It’s always advisable to check how much disposable income is left with you after you have accounted for your living expenses and investments for your future. Of that left over disposable income, you can begin to satisfy a few of your wants.

All your needs and wants will be funded by your monthly pay packet. Go for wants only if you have money left over after you have invested for all your future goals and met your living expenses.

Relationship with consumerism

India’s consumerism, especially with the youth of today, makes this exercise of differentiating more important.  With quick money at their disposal, the youth of today have funneled consumerism by buying the latest phones, vehicles and gadgets.

Many have even taken credit card debts and personal loans to possess these. No one has stopped for a moment to think whether they really needed these products.

Another problem is that investors tend to succumb to marketing gimmicks by sellers and end up buying products which are wants and not really needs. Ask yourself how many times have you walked in a store to purchase a smaller TV and walked out with a bigger one ?

The need of the family might be to buy clothes for the children, but the “buy three get one free” offer is too tempting and you end up with more than you need – you have made a basic need into a undesirable want !

Here is what one of the readers of TheWealthWisher, Dhiraj Bahroos has to say about consumerism and needs :

How often do you see items ubiquitously priced in retail outlets for Rs 199/-?  Is Rs 199 so much better than Rs 200/- . Amazing on how such a psychology of pricing can attract more consumers to purchase the product. How often do you get an Éclair instead of the change of Rs 1/-?. Other tricks deployed by retail outlets are “Buy one get one free” and “Second half priced”. The perception of discounts is too tempting to resist for the consumers. It is not the “need” factor but the “save” or “affordability” factor which drives the purchasing of the new generation. New strategies are being deployed by retail outlets to sell mainly targeted for the new generation. A more recent one is to unbundle the items. e.g. get a mediclaim for as little as Rs 9.95 per day.

Unlike the old generation which were driven by the “need” factor, the new generation weighs all consumables by the “afford” factor. Credit cards have now-a-days become a necessary evil, elusively adding to the “affordability” power of the individual. While probably this new generation perception of consumerism is good for the global economy and employment growth, it also creates uncalled inflation and unsustainable bubbles.

With India having more employed youth than even before this trend is only set to grow. How long can this sustain would be difficult to predict.

Is it time for value-driven consumerism ?

– Dhiraj Bahroos (bahroos@yahoo.com)

On a cold winter morning, a hot cup of coffee is probably a need for some while it still classifies as a want for many. The same hot cup of coffee is neither a need nor a want on a hot sweltering summer afternoon.

Such requirements are different for different people. It’s up-to us to decide what they are and zero down on the needs first. While we chug along in life, we should also try and pick up a few wants along the way.