Welcome to Finance and Fury. In this episode I want to discuss and clarify the concept of needs versus wants – especially in relation to spending habits

  1. Needs and wants – Each of these terms can be very subjective – as what is a need for one person may be a distant dream, or simply a want for another – where they have no means of actually achieving the essentials of another person
  2. So in this episode – we will go through how to discover and clarify the differences between what your wants and needs are
    1. The aim of this is to help quantify spending habits – helping to explain the differences between essential and discretionary spending habits
    2. Again – what is someone’s essential spending habit may be a distant want, or what would be considered incredible discretionary expense for another person in a different situation – or with different goals or life focuses


First – lets look at some different ways on how to then define these terms – of wants and needs

  1. When talking about wants versus needs – this could often be discussed as essentials versus discretionary spending –
    1. However – Here is where things get murky – One person’s essentials could technically be another person’s discretionary spending
    2. Not everyone will be the same – whist the general classifications for these types of expenditures may be similar – we are not
      1. Essential expenses are expenses that are required for living – In addition, essential expenses may be broken down into fixed expenses and variable expenses
        1. Fixed Expensesare expenses that are the same each month. Examples include rent or mortgage, car payments, car insurance, property taxes, home insurance, and school costs.
        2. Variable Expenses – are expenses that vary each month. Examples include car maintenance, gasoline, food, electricity, heating gas, phone, etc.
      2. Non-essential expenses, or discretionary expenses are the extra things you spend your money on
        1. Non-essential expenses include most of the things we technically don’t need, and most often includes many items where we can waste money the most
      3. But these definitions are so vague that it is hard to quantify exactly what should be essential and what is non-essential –
        1. Or said in another way – what is an essential for your cashflow expenses and what is discretionary on top of this – and what could be better spent elsewhere – such as paying down debt, or investing to build towards financial independence
      4. This is important to clarify as soon as you can – it can help to reduce your discretionary spending habits through life –
        1. There is a thing known as the hedonic treadmill – this is where if you derive happiness from spending habits – which is very easy to do – you may be stuck on a treadmill that is constantly increasing in speed – which eventually – regardless of your fitness you may struggle to keep up with the speed at which you are running
        2. To look at this further – if you start out your career and are earning $50k p.a. – you might be going from earning nothing – now all of a sudden – you can afford somewhere to rent – might be with some room mates – as well as buy some new clothes – go out and have dinners and some nights on the town – by the end of the year – your $50k after tax, which is about $43.6k p.a. may be all gone – so no savings left
  • Then next year – you get a pay rise – to $60k – which is $50k post tax – you realise you have more money – so you move out into a place with no roommates so you are covering the full rent – you go out to fancier dinners which cost some more money – now at the end of the year – still no savings –
  1. Repeat these habits for a while – say 6 years in the future you have done well in your career – and you are on $120k gross income – or about $88k net of tax – you all of a sudden are living in a much nicer place – eating the best foods, having a nice place to live, going on holidays regularly
  2. The question is – are you any happier? The answer is normally not – you do have a better quality of life when measured by a consumeristic point of view – but after a certain point – does spending $200k on a dinner benefit you more than spending $30?
    1. From a point of perception, it may – that is where we do attach a higher value things that have a greater cost to them – our brains ways out of feeling cheated from spending hundreds of dollars on food and a few drinks when we could have achieved the end result – i.e. being full and a little drunk for $40
  3. Think about it – someone might think that they need an income of $200k p.a. to cover essential expenses – or in other words – to meet their needs – as this is their accustomed lifestyle – as opposed to other individuals who only require $30k to meet their needs

So – how to get off this hedonic treadmill and help clarify and cement what your essentials and non-essentials are – to help you move forward in financial independence – as if you constantly spend what you receive in income – you may have a much harder time of this –

Typically – essential spending is broken down into the following

  1. Essential elements to your life – and the spending that goes along with this would be considered essential spending
    1. Housing – the cost of maintaining your residence – this could be either in the form of your PPR – through mortgage costs and other expenses – or alternatively rental expenses – but everyone needs somewhere to live
    2. Food – the cost for you to feed yourself and your family
    3. Clothing – what are your expenses for maintaining yourself to be clothed
    4. Transportation – car costs, insurances, fuel, insurances, etc. – or public transport – most people need to be able to get around
    5. Covering bills – internet, phone bills, power, water, etc.
    6. Education costs for children – pretty simple one – the tuition costs as well as the additional costs like books, extracurricular activities – and the like
  2. However – getting into the philosophical side of this concept – are each of these things truly essential to you? And how much would you consider is needed to be spent on this?
    1. For housing – everyone considers different levels of housing to meet their needs – hence everyone has a different concept of what is considered an essential cost in housing
      1. If you were choosing to be homeless – then your essential expenses on housing would be pretty much zero
      2. Or if you think that a 10 bedroom home is essential – then your expenses would be much greater than someone who lives in a one bedroom apartment
    2. For food – the essential cost for this can vary significantly as well
      1. Technically – you could live off a bag of rice and a few vegies each week – maybe not so well – but many people around the world sustain themselves in this way – when compared to buying $30 steaks and gourmet meals for each night of the week
      2. Super market expenses versus dining out – I personally would quantify dining out as discretionary – but other individuals consider food costs essential – regardless of where the cost is accrued
    3. For clothing – here the lines get blurred between essential and discretionary further –
      1. Most people cant go around naked – but what is the difference between a $3 shirt at kmart versus a $90 shirt from a brand store? Again – one person would consider the $90 tshirt as essential
      2. Here the lines get blurred further for work attire – in society there is the need to look professional in a lot of roles – I know that I need to in mine – but there isn’t much of a difference between a $400 suit and a $4,000 suit – except when you look on the inside at the label
    4. For transportation – Some people consider cars as essential – which for most people they would be – however what type of car?
      1. A porche or a mazda? Both form the same sort of function – getting from point a to point b – but there is a massive cost difference in getting there depending on the type of car that you occupy – as well as ongoing costs through insurances and running costs, like maintenance

In addition – the discretionary expenses can vary for people –

  1. Non-essential expenses – such as entertainment, holidays, gifts, general spending – some might consider these as essential expenses whilst other consider them to be non-essential –

By now – I hope the point has come through that everyone is different – and hence – so are there perceptions of essential and non-essential/discretionary expenses – so how do you narrow this down for yourself?

  1. But a better question to ask – may be What is essential for you?
  2. This will be based around your financial and lifestyle goals – if you don’t know what your goals are – especially financial goals – then your spending habits can get lost in the here and now pleasures –
    1. If you have no end goal of needing to save money, or invest disposable incomes or direct this to pay down debt – then there are technically no negative consequences in there here and now to go out and spend $200 on a night out – what else would this money be used for? Sitting in a 0% interest account? Well why not spend it now in this case? It helps to maximise your utility or satisfaction in the short term – so it may rationally be the best decision to make
  3. However – if you have better use of these funds in your mind – such as your long term financial independence – or helping to pay off additional debt – or something that has a greater opportunity cost attached to it when compared to simply spending it now on a good time – well then you can help to quantify spending habits better for your own best interest –
  4. How to help achieve this – you need to have your goals –knowing how much you need to put away each month towards debt repayment or towards financial independence – either SS to super or placing into a monthly investment
  5. Outside of this – you will have money left over – for these funds – how do you decide where they should be spent?
    1. Come up with a list – for each of these major expenditure categories – housing, food, transportation, etc – what would you be happy with spending based around where you are at now?
      1. Is this meeting your long-term lifestyle goals?
      2. If you are starting out on your career – you might aspire for more than living in a share house with 4 other people and driving a $4k car – which is perfectly fine and reasonable – however – what would you be happy with?
  • Setting benchmarks helps to avoid a situation where you end up confusing essentials to non-essentials – or mixing up your needs versus wants –
  1. Go through each category – how much do you need to spend on housing to meet your lifestyle goals?
  2. Another question to ask – Is if these needs are achievable? You have to work within reality
    1. We could all say that we need a Winston Churchill gold toilet – but this would be a little delusional – so it is important to work within reality
  3. Having a clear idea as soon as possible on what is an essential expense versus what is non-essential is really important

The major point of this is to avoid a spending creep as your incomes increase – this is the first step = through defining what is essential to you and how much should you be spending on this

  1. Helps to avoid the hedonic treadmill – or the adjustment back to a baseline of satisfaction gained from additional spending
  2. The only wait to avoid wasting money is to do this as soon as possible – before the spending creed kicks in –
    1. Once this does – and your spending habits increase – it can be much harder to take away from these habits than it is to avoid increasing these habits
    2. Once a habit is formed – almost impossible to get rid of it – the best way is to rewire it –
  3. So it is better to get into the habit of spending money on your future self – through working towards financial independence than it is to spend money on a fleeting moment –
    1. The way I think about it is the more that I put towards my future self now – the more that I can afford to have greater essential and non-essential lifestyle costs later in life

So in summary – it is important to have your goals in place to work out what your financial independence targets look like – then work back from there

  1. Set aside what you need each month to pay off debts, or invest in your future
  2. Then out of your remaining cashflow – figure out what is essential in expenditures and what level of lifestyle you would be comfortable with
    1. As you might wish to have a $10m house – and who wouldn’t? but the ongoing costs for this may eat into everything to the point you end up with nothing – no house, no financial future
  3. So have your expenditure goals and stick to these – regardless of what your income is – if your income goes up – then direct additional discretionary funds towards your future –
  4. As long as you are happy – and there are no debt collectors at your door – and you can maintain yourself – and you are on track with your goals of placing funds towards debt repayment and financial independence – then you have likely met your balance between your needs and wants
  5. IF you don’t feel like you are on track for this – it is probably important to sit down and go through these factors and sort it out as soon as possible

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

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