Knowing the difference between needs and wants.

I have often written about the difference between needs and wants. To be successful in planning for your financial future you have to understand the difference between the two. You need, food, shelter, basic transportation and any required health maintenance items. These days I would accept you also need a cell phone and decent internet access. The one most people miss is the need to save and invest for the future so you can pay for all the other needs once your income stops or is diminished. Almost everyone hopes to retire at some point, but you can’t if you have not met the need of saving and investing in your early years.

You do not need Cable TV, to eat out, the fastest shiniest car, or the biggest house you can afford. There are a lot of other things you don’t need that you may want. I am not saying you can’t have any of your wants, what I am saying is whatever money you have left after you meet all your needs can be used to purchase the wants. But you first must recognize saving and investing for retirement as a need. Once you do that you will know how much money you have left to purchase your wants. You have to allocate that money wisely and decide what you want the most, and if you have not taken care of your needs you should not spend money on wants until you make enough money to pay for those wants.

I have always paid for my needs first and when I help people with their financial planning I strongly encourage them to do the same. As to how much you have to save and invest that can vary greatly according to your personal situation. But as a rule of thumb if you are young and you do not have a pension of any type you should be putting 20% of you paycheck aside for retirement. If you are old with little to no savings that number will be higher depending on your age, how much you have already saved and how much longer than the average person you are planning to work.

The median household income is around $54,000.00. To keep the math simple I am going to use $50,000 in my example. If you earn $50,000 you should be saving 20% which comes to $10,000 a year. That leaves you with $40,000 to spend on other needs with the remainder going to your wants. Someone making more should be able to spend more but should also save more, the goal being to keep your spending and life style consistent when you retire. So a person making $100,000 should be saving $20,000. Leaving them $80,000 for other needs and once those are met the rest can be spent on wants.

Since the cost for basic needs doesn’t vary that much, the person with the higher salary has much more, as percentage of remaining salary, to spend on wants. Let’s say other needs cost $30,000 bringing the person with $50,000 income a total need cost of $40,000 leaving them $10,000 to spend on wants. The person with $100,000 income has total need cost of $50,000 leaving them $50,000 to spend on wants. That is a $40,000 difference, so they can get the shinier car, bigger house and a lot of other things. The problem is that many people in the lower income bracket see what their neighbors, friends or family buy and mistakenly think because “everyone else has it “I must have it, turning a want into an artificial need.

If you don’t have a pension and are not making your 20% contribution to your long term savings and investing you will have a hard time retiring. You need recognize the need to save and identify wants you are spending money on so that you can start reallocating that money to the need you have been neglecting.

One of the easiest areas is to ditch cable TV. I have always met my needs first so several years ago when my son was younger I “splurged” and got cable TV. At the time I did this I had recognized high speed internet as a need, and my son convinced me that cable was only $10.00 more a month. So a good value to spend some of my “want” money on. Over the years the cable TV portion of the bill had grown significantly to where it is twice the price of the internet service. My son in moving out and he is not buying cable TV, he is just getting internet. That made it clear to me how much I am now paying for the TV portion alone. Plus they are raising their prices again this month. While I can still afford this want, I don’t want it bad enough to pay the price for it. The cost of Cable TV for me will now be $82 dollars a month. That comes to almost $1,000.00 a year! Or in other terms, for some like me that likes to travel, the cost of a weekend trip to Paris if I catch a sale. I dropped cable TV.

For someone that is in the $50,000 bracket, that is not currently meeting their saving and retirement need, canceling cable TV can pay for 10% of that need as $1,000 is 10% of the $10,000 goal and it is a great start.

You can pick up another $1,000 by eating out one less day a week (average meal price of $20.00 for two people).

By simply eliminating spending on those two wants you are saving $2,000 more a year.

It all starts with recognizing saving for retirement as a need, and identifying some wants you can live without, but you can do it.