A key component of financial success is knowing the difference between needs and wants, and then being able to say no to the wants. Saying no to the wants means you are financially prioritizing your needs and goals. According to a Gallup poll, only 30% of Americans have a long-term financial plan that includes savings and investment goals, both of which are priorities.
If you haven’t been able to financially prioritize your needs and wants, or if you feel like your wants have always come first, it’s time to change things up! Reaching financial success means you put the most important things first, and the rest comes later. Sacrificing is a big part of it. I’m going to walk you through how to financially prioritize your needs and wants, so you can start making progress towards your goals.
How to Know the Difference Between a Need and a Want
Before I get into financially prioritizing your needs and wants, it’s important to understand what a true need and a true want actually are. A need is something critical to your livelihood or your ability to make money. A roof over your head. Food on the table. Things that would keep you from living or keep you from working to make money should be considered needs.
A want is something that you can live without, you can wait to have, or it won’t help you get ahead. Your 5th pair of jeans. Going to a nice restaurant to eat. Getting your hair and nails done. Things that are nice to have but not critical to your livelihood are considered wants. Wants are fun. Wants are exciting. Wants can be costly.
When you know the difference between needs and wants, you can start recognizing what will help you reach your goals and what won’t. I’m not saying you can never have the things you want, but to reach financial success (especially at the beginning of the journey) you will need to say no to the things you want.
How to Financially Prioritize Your Needs and Wants
Start by financially prioritizing your needs
Since your needs are more important than your wants, you’ll want to start be recognizing the things you need in your situation. You likely have all of these things already, so you can specify the current amounts spent on each of them. If you don’t have any of the things you need, make that your first priority. Here is a list to get you started:
- You always need a place to live and a way to get to work (so you can make money)
- You always need food on the table (no one said fancy food)
- You always need to ensure your children are taken care of (daycare, clothes, etc.)
- You always need your bills to be paid on time (subscriptions aren’t necessarily bills that need to be paid – depending on what the subscription is, it could be a want)
- You always need to pay the minimum on your debts
The things listed above are a great start, but everyone’s situation looks a little different. Think about the things that are critical to you and your children’s livelihood. Those things always need to be taken care of, and will always come first.
Then, financially prioritize your goals
You’ll want to understand how much you spend on your needs. Whatever that number is on a monthly basis, subtract it from your income. Whatever is left over will be needed in the next steps of prioritizing your goals and wants.
Now that you know how much your needs are every month, you can determine what’s left over for other things. Whatever the number is, strive for 75% of the remaining income to go to your financial goals.
Please note that I said “remaining income”. This is the number that is left over after your needs are taken care of. For example. If you make $4,000 every month, and your “needs” total $3000 each month, then your remaining income would be $1000. 75% of this (or $750) should go towards your financial goals. Financial goals include things like:
- Extra debt payments so you can become debt free
- Extra savings so you can take a trip, have an emergency fund, insert other savings goal
- Extra money put away for one-off, upcoming expenses
Your goals are things that you’ll want to save for or allocate money towards. After your needs are taken care of, you want most of your money to go to your goals. Whatever your goals are, they are going to help you get ahead or do things you aren’t normally able to do.
Finally, financially prioritize your wants
After you’ve prioritized your needs and your goals, it’s time to finish off with your wants. I don’t believe that people should be without the things they enjoy for long periods of time. I also don’t believe that a person’s wants should come before their goals. It’s all about finding a balance.
Following the formula in this article is a great starting point for you to financially prioritize your needs and wants. If you are following the formula, then the remaining 25% of the money left over after your needs are covered should go towards your wants. If we’re following the example above, then $250 would be allocated to your wants.
Not everyone has the same income, and most people don’t have large amounts of money that can be allocated to wants. That’s perfectly fine! Even if it’s as little as $25/month, give yourself something to indulge with. Remember, this will be temporary, until you master your money and reach the goals you need to.
Related: How to Move Past Financially Average
As long as you can recognize your needs, goals and wants, you can start to make changes to ensure you’re in the best financial position possible. It all starts with knowing, then doing, then being consistent. Follow the formula in this article to start with:
Income goes first to needs, then 75% of the remaining income goes to goals, then the remaining 25% goes to wants.
Things will get easier as time goes by. In the beginning, it will be hard to put your wants on the backburner, especially if you aren’t used to doing so. However, good things don’t come easy! Financial freedom is worth being uncomfortable for a relatively short period of time. Have you been able to financially prioritize your needs and wants? If so, what is your strategy for doing so? Share by leaving a comment below!