Setting Goals is the most important aspect in financial planning, as it sets our target for which we have to arrange our resources. But this is the most confusing and difficult task for many. When I ask people to write down their goals, many write as: big house, big car, super education for kids, exotic foreign vacation etc. It is only when I sit and explain them the difference between needs and wants or what compromise they will have to make with their current life style to achieve those, they realise the real picture and settle with realistic goals. You must have read many articles on setting SMART Goals…understanding the difference between needs and wants will help you do that. Apart from this, it will help you in managing your family expense budget too.
What are Needs?
Needs are those things that provide for our daily existence – food, water, shelter etc. In Financial planning terms, needs are those things which cannot be ignored and are of utmost importance to your overall financial wellbeing for e.g. settling emergency fund, buying adequate insurance coverage, reducing debt etc. These come under absolute necessities or near necessities. Personal care expenses, child care expenses, reliable transport etc. does not come under the absolute necessity but is nearly there; we cannot ignore these.
What are Wants?
Wants are those things which are not necessary but gives you happiness or fulfilment. These are those things which give justification to your attitude and social status. Like having a Car may come in as your need but having an AUDI will be your desire, having own house may be your need but having pent house or sea side bungalow will be your desire and so on.
Balancing between needs and wants
In our financial life where we really mess up is when suddenly the things we desire, in our minds become things we need. Even though the meaning behind a Need and a Want is quite straight-forward, when it comes to differentiating and prioritizing one’s needs and wants, many people still have difficulties.I have seen many cases where people end up purchasing products because the advertisement of the same aroused a deep yearning for it and they were convinced that it is a need. It has been seen that when you yourself don’t understand your needs, you may easily confuse wants for needs. For many, financial planning is not a need but investment is. So they always keep on looking for those products which will help them make more money in shorter time frame. But in reality, following financial planning concepts can help them improve their financial life, for the better.
It is unrealistic to try to live without any desires. Desires fuel our creativity, energize us, give us fulfilment, and push us to reach our goals. But problem arises when the desires becomes your needs. Suddenly your desire puts you into a state of desperation and a desperate person is not a rational one. One should always concentrate on the needs first and then stretch himself to achieve the goals which he desires. Some examples which I would like to share here is –
- Saving for retirement is a need and so does saving for children’s education, but it’s not wise to compromise on your retirement savings for your desire to educate your child from a foreign university.
- Its fine to treat buying your first car as need but it’s not fine to stretch your loan to such an extent that it will hamper your long term savings for your child education or your retirement.
- If you don’t understand your insurance need and keep on purchasing policies with the view of generating returns, you may end up being underinsured and in case of a mishap, the family would find it difficult to meet their ongoing expenses & the cherished goals.
Your financial future is in your hands. Financial planning is the key. Use your finances wisely towards your needs and wants.You may achieve what you want in a longer time frame; the good thing is that you have taken care of what you need, first. If your Needs are all well taken care of, you can work on anything you want with no worries