Difference between Needs and Wants

One of the important aspects of Financial planning is spending money wisely. Now, what does it mean when I say “Spending money Wisely”? All the expenses & spending activity we do can be classified under two sub heads ‘Needs’ & ‘Wants’. Improper handling of money happens when you spend too much on your Wants and too less on your Needs.

The aim should be to spend/save money for your needs and then take care of your wants. Once you prioritize all your expenses/goals in these categories, planning your finances becomes easy!

What is the Difference between Need and Want?

Needs: A need is something which is essential for you irrespective of the financial situation/conditions. These are the things you have to take care first and only then comes other things which you can do without.

Needs Example

– House Expenses
– Child Education
Saving money for Retirement
– Medical Expenses
– School/College fees and expenses
– Family Vacations and outings (in limit)

Wants: These are things which you wish to have but they are not above your Needs. For example a Car is a Want when compared to your Child Fees or Education saving. You can live your life without car but Child Education is Vital and cannot be compromised.

Some people’s Wants can be a Need for others and vice versa. It all depends on personal life style and attitude. But the main point here is that you have to differentiate between your Needs and Wants at short to medium term time frame and Long term view.

Wants Example

– Extra Vacation
– Expensive clothes above your normal requirement
– Expensive Car or any vehicle above your budget

Note: Understand the point that Wants are not something which you should avoid but your Needs can/should not be compromised because of your Wants.

Why is it Important these days?

These days almost everyone live their life in a unplanned manner especially their finances are Unplanned in a Big Way. People spend first and think later/late about it. But money spent once will not come back.

Once you prioritize things well and have a proper road map on your spending pattern you can take care of your Needs first and then move towards fulfilling your Wants.

Let us take a case Study

One of my friend spends his money in a pathetic manner. He earns around 30,000 per month and is already in job from last 2 yrs. He spends a lot with his friends on parties on weekend. He buys branded shoes which he is very fond off. Great …!! He does not understand the value of what small savings can do.

Just before the year end he asked me how can he save the tax and wants to invest some money.

On further inquiry I come to know that his Parents are dependent on him (though he is not sending any money at this moment to his home). So he needs good amount of Insurance, he has no savings till now! Finally he is not left with any money to even pay insurance premium this year (2009), not invest any money in some mutual fund.

What is the point?

This person has spent his money on all the things he wants and nothing on his needs- which are essential. He has violated fundamental rule of Financial planning which will affect him very badly.

Once all your needs are taken care of and if you are left with surplus, I, myself would encourage you to spend your money on satisfying your Wants like no tomorrow!! But first comes important things- you can live without your Wants, but not without Needs.

Imagine you are going for Golf Games and you are not left with money that is enough to take your Family out sometime on vacations.

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20 CommentsAdd Comment

  1. Anonymous

    manish,..

    i think you u r using ‘there’ instead of ‘their’….it will only add beauty to ur blog..

  2. Sandeep

    Dear Sir,
    I am CA Sandeep Kanoi from Mumbai. I am the web-Admin of http://www.taxguru.in . Leading website for Chartered Accountants, Company Secretaries and other accounts professionals.

    Currently, I’m in the process of promoting more sites in several fields and am looking for quality partners to exchange links with. I believe that your website will be an impressive addition to the list of sites I currently exchange links with and that’s why I would be interested to know if it is possible to place a link to my website http://www.taxguru.in from your homepage?

    Please send me your site details so I can link to yours in exchange.

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    With Regards,
    CA Sandeep Kanoi
    http://www.taxguru.in

  3. Manish Chauhan

    Sandeep

    Your site looks good to me . I am sure it will provide value addition to my readers in area of tax . Sending you a mail .

    Manish

  4. Neha Bagoria

    Manish that's a very micro look at the investment scenario. Yes at times we learn the lessons only after tastin' rough waters.

  5. Manish Chauhan

    @Neha

    yeah … most of the people learn by making mistakes and that a good way of learning , but better we learn from reading and sharing knowledge :)

    Manish

  6. Bank account

    I totally agree with you and it is true that differentiating needs from wants is the first step in financial planning. Here is my story.

    I did not write all my wants and needs in the sheet of paper right away. When it comes to money, I base my decision on figures. So what I did was, I looked at my previous bills. From the expenses I incurred last month, I separated needs from wants.

    At the end of each month, I sit down with my expenses record book and compare the previous bills from the new one to see if I made progress.

    For three months now, I was able to cut half of my want's expenses and added a considerable amount of money in my savings account. Now, I am looking forward to invest in stocks soon.

  7. Manish Chauhan

    @Bank Account

    Excellent .. thats an inspirational story .. If every one starts doing this , I am sure everyone will be able to save a good part of their unneccessary expenses .

    manish

  8. Vinay

    You have given very basic thing, which we usually ignore, while spending money. An eye-opener differentiation on “wants” n “needs” .

  9. Me.

    Manish, this is a really good article but I was hoping to find the things that effect needs & wants such as location ..
    For example, in really hot countries, people NEED air conditioning while in other countries ACs are considered a want. Another factor that effects N&Ws is occupation/education. A mobile is a NEED for a business man while for a shopkeeper its not that important.

    I was hoping to find more factors for my research since I can’t find any other factors.
    -ThankYouu. :]] x

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