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Needs vs. Wants - A practical approach

I would say the biggest problem most people have in determining their financial success is the Needs vs. Wants component of the process. It is really easy to understand our basic needs in life. Food, shelter, transportation, and proper medical care. Wants are everything else: cell phone, restaurants, camper trailers, sports cars, etc. The challenge that most people have with these two items is that sometimes a want improves the situation so much that it nearly becomes on the same level as some of their needs. But for the purpose of budgeting and improving your financial position, should it be on the same level?

This classifying of wants on the same level of needs is a noticeably big problem. I have heard everything from ‘I need a second car because my husband and I work on different ends of town’, ‘My kid needs a cell phone because if they are out I need a way to contact them’, ‘I need my camper trailer, it is the only thing that helps me be sane’, and I could go on and on. The list is neverending and it is really a shame because it unfortunately holds people back from doing what they genuinely want to do.

The issue that I have seen from most budgeting/financial books is the idea that you should really cut these wants out completely or to budget line-items in to account for these items, etc.

Obviously, these methods work, do not get me wrong. But it is often encouraged that most people cut out their ‘fun’ entirely, which people try their best to do. But what happens one week into your financial restructuring plan, when you would normally order in a pizza? Remember, you are trying to offset potentially years of ‘bad’ habits and so it would be expected that you may falter and ultimately order a pizza anyway. Most people quit immediately after an event like this occurs because they are discouraged. It is really sad to see because at this point most people have spent hours diving into their financial situation and coming up with a plan that should work. But, to continue with the theme of this book, the math (aka the budget, in this chapter) is really only one component. The human component is truly what will make or break our experience.

So let’s look at some practical approaches to determining how to decide between our needs and our wants. There will be several approaches and so I suggest you try one, and if it doesn’t work come back and try another.

Would you rather

Would you rather is an approach that most people can easily implement. With all of our approaches, you will first want to plug in your needs. Not the wants you have determined to be needs, but the real needs. This is only food, shelter, transportation, and proper medical care. If you add any other categories here you are cheating yourself.

Once this has been done list the remaining expenses that you have in your household. List the items like the camper payment, the cell phone bill, the restaurant meals, fast food, bowling, etc. At this point we do not care about the cost; all we care about is what you deem to be most valuable.

To save time, list the items in what you believe is your priority list.

The rest is simple: start asking yourself, ‘Would I rather do/have INSERT ITEM or INSERT ITEM’. The answer cannot be both. You must choose one or the other. If the item you choose is already higher on your priority list, then do nothing and move to your next item. If it is not, switch the items and continue the process. You will be surprised that not every item will remain in the same priority. If nothing changes, great! It means the next steps will be even easier.

To demonstrate this, say your list is:

• Cell Phone

• Camper Trailer

• Eating out

• Bowling

You would first ask yourself ‘Would I rather have my cell phone or my camper trailer?’ If the answer is your cell phone, you would simply move to the next item and continue asking the question. But, let’s assume the answer is the camper trailer. You would switch the answers and your list would become:

1. Camper Trailer

2. Cell Phone

3. Eating out

4. Bowling

And, you would now ask yourself, ‘Would I rather have a cell phone or eat out?’ Let’s assume the answer is the cell phone. You would then ask yourself, ‘Would I rather eat out or go bowling,’ and let’s assume the answer was Bowling. Well, now your list would become.

1. Camper Trailer

2. Cell Phone

3. Bowling

4. Eating out

Voila - You now have a list of what is most and least important to you. We will cover how to use this list at the end of the chapter.

Time-Value of your items

This is my favourite approach and weighs your items based upon how much they cost you on an hourly basis. The list you’ve produced shouldn’t be the list you use exclusively, but it will allow you to better understand what is actually important to you. This method requires us knowing what the cost of each item is. So, using the same list as above, let’s assume the following:

1. Camper Trailer - $300 p/m - Total cost, including maintenance repairs, lot rental when used, etc. Uses 5 days per month for 4 summer months. = 20-day total usage.

2. Cell Phone - $100 p/m - Monthly plan

3. Bowling Team Club Cost - $40 p/m - Bowls once a week for 3 hours - Part of a team and cost is split between all members.

4. Eating out - $120 p/m - $60 twice a month - Assume an hour and a half at the restaurant each visit.

The process is really easy. First you need to determine the overall cost of an item and then divide it into the amount of hours it is used. It is important to note that some items cannot be used year-round, like the camper trailer, so you must use an annual calculation to get an accurate cost. Let’s go through these item by item:

Camper Trailer - The overall cost is $300 multiplied by 12 months of the year = $3,600. The overall time used is 20 days per year multiplied by 8 hours each = 160 hours. You now simply divide the overall cost, $3600, by the amount of hours it is used, 160. So $3600/150 = a cost $22.50 per hour.

Cell Phone - Cell phones are tricky to calculate because usage really depends; but let’s assume the overall usage is only 30 minutes per day. The total cost per month is $100. The overall time used is 30 minutes per day multiplied by 30 days in a month = 15 hours per month. You now simply divide the overall cost, $100, by the amount of hours it is used, 15. So $100/15 = a cost of $6.66 per hour.

Bowling - The overall cost is $40 p/m. The overall time used is 3 hours per week or 12 hours per month. You now simply divide the overall cost, $40, by the amount of hours it is used, 12. So $40/12 = a cost of $3.33 per hour.

Eating out - The overall cost is $120 p/m. The overall time used is 1.5 hours per visit, or 3 hours per month total. You now simply divide the overall cost, $120, by the amount of hours, 3. So $120/3 = a cost of $40 per hour.

You can see why eliminating eating out is often recommended. The cost per hour is by far the largest cost. It is far more efficient to eat from home. By the outcome of these calculations you will find the list of least costly (per hours enjoyed) items are as follows:

1. Bowling

2. Cell Phone

3. Camper Trailer

4. Eating Out

Now as I mentioned, you shouldn’t be using this selection process exclusively but it does demonstrate what is most valuable to you, in terms of how many hours are actually enjoyed doing the activity. By understanding how much things cost on an hourly basis, it is always good to see how many hours you would need to work to actually use the item you are using.

Using eating out as an example, it costs $40 per hour to eat out. If you are making $20 per hour, and are losing 30% of that to taxes and other deductions, you are actually only bringing home $14. It would cost you nearly 3 hours of you working time to enjoy one hour of eating out and nearly 9 hours for the total cost of eating out. Is it really work more than a day’s pay to eat out twice a month? There is no right or wrong answer, as it really depends on what you want in life. However, there are certainly less costly experiences like bowling that would be far more economical.

Overall Cost

The last method is to simply compare the overall costs of items to determine what needs to be cut out. Now again, this isn’t going to be the method you will want to choose when making your ultimate list. But, when taking into consideration the Overall Cost, paired with the Cost per Hour, and then run through the Would you Rather process will probably give you a very well thought out list of your priorities of spending and ultimately living.

At the end of the day, what is most important is that you make goals that you wish to achieve and then determine your priority list. When you have a goal in mind it is quite easy to see what is profoundly important in your life.

One last point I want to make is, that no one really cares how you spend (or do not spend) your money. Everyone is so concerned about the opinions of their parents or their children’s friends, their neighbours, or even their family.

There was a recent survey conducted by the Canadian Payroll Association which based upon the Canadians surveyed. 48% said it would be hard to make ends meet if their paycheck was delayed by even a single week, 40% said they spend all or more than their net pay. 47% were only able to save five per cent or less of earnings. And 39% responded saying they feel overwhelmed by their level of debt.

The point I wish to make is that most likely your friends, family and neighbours are also struggling financially. By not caring what others think it may possibly influence people to make better decisions themselves.

To summarize: the average Canadian is struggling and has a fairly good chance of being in the exact same boat, or worse, than you. Always remember that whenever someone gives you advice or tells you what to do, the fundamentals in this book will teach you how to solve your behaviourally-based finance issues. Once that is done you can then move on to more advanced, and optimized, approaches to finance.

Exercise: Go through the ‘Would you rather’, ‘Time-Value’, and ‘Overall cost’ exercises with your expenses. This will give you a truly good idea of what your priorities cost you!

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