Identify Needs vs. Wants
We often say "I need" when we want something. "I need coffee" when we are tired, "I need an iPod" because we like to listen to music, "I need new clothes" because we feel more attractive in them. When times are good and we have extra money, it is easy (and fun!) to spend more on things that enrich our lives and make us feel better because we enjoy them. It's wonderful to grab a delicious latte, eat out at a great restaurant, see the latest movie that everyone is talking about. But if our finances get tight, it is stressful to have to let go of things we enjoy. We start to think of luxuries as necessities.
According to MSN Money, American families spend about 43% more than they make each year. This can be livable if income rises from year to year, but can be disastrous if income shrinks, prices rise, or a layoff or health emergency occurs.
Look at your life from the perspective of someone fleeing their house in an emergency. What do you take? What is important? People always say the same thing about what they are grateful to have saved: their family, pets, important papers, and irreplaceable items of sentimental value, such as photographs. Priorities become very clear. We can actually live on far less than we think we can.
It can be hard to assess your true needs versus what you want, especially during a time of financial pressure. But it will help you to understand where you are and what you need to do to achieve your financial goals.
TRACKING REALITY
First, write down everything that you spend money on. Review your bills for major expenses, such as rent or mortgage, utilities, and car payment. Next, write down everything that you buy during a day. If you have the time, do this for one to four weeks. Carry a small notebook and pen, or even just a folded up piece of paper will do. This will help you to keep track of the little things that you spend cash on during the day. Include everything that you spend money on using any form of payment, even snacks from the vending machine. If you don't have the time to do that, then take a day or two to write down what you remember spending money on.
REVIEW AND ASSESS
Next, review all your lists. Create a new list for everything that sustains life, health, and security. This is your most important list. This includes mortgage or rent, food, utilities, healthcare, prescriptions, over the counter medications, transportation to get to work or school, and insurance. Slightly lower but still in this category are any needed repairs or maintenance that keeps your home or car working. Maintenance that is not necessary for operation (for example, replacing faucets because they look bad, getting your car painted) should be postponed.
For the second list, look for things that are important to pay to avoid negative consequences that may affect your long-term financial standing, such as credit cards and other bills with monthly payments. Look at each account to determine what the minimum amount you can pay would be without incurring penalties.
The third list is everything else. These are your wants. These are things you enjoy or want to do and include eating out, professional organizations, gym membership, lattes, cds, books, and movies. These are all things that we want to be able to afford, and may feel that we need them because they make us feel better. But in reality we can live without them when we have to. This is your least important list.
Now, hopefully, your situation is not dire. After assessing what your needs are in comparison to your income, you may find that you can afford a few wants. Pick the one you most want to do or that gives you the most pleasure. You'll know which one to pick because of how disappointed you felt when it went on the least important list. Try to work it in once a month to give yourself a little boost.
If you can't afford any wants,
just remember that you won't be in this situation forever. Things may
be difficult, but if you can support your needs and keep stability in
your life, that is more important than having everything you want.
If you need to further reduce the most important expenses, investigate
ways to lower costs. Replacing existing cell phone plans with less expensive
ones can keep your service on for basic functionality. Reduce other
services, cancel subscriptions, lower utility usage. Cancel that gym
membership and start jogging or taking hikes on weekends. Get down to
bare bones.
While it can be painful to feel that you can't afford your current lifestyle, by eliminating less important spending you will be able to put money in savings or pay down debt, which will give you an added sense of stability and peace of mind. And that is priceless.