Money Makeover Part 3: Needs
Did you do the prior exercise? If not, please go back and re-read the article Money Makeover Part 2: Origin. It lays a foundation for this article, part three of the five-part series to build family wealth.
As a reminder, here’s our acronym for the Money Makeover journey:
Mindset
Origin
Needs
Experiences
Yes!
Today, let’s take a look at Maslow’s Hierarchy of Needs.
There are basic physiological and safety needs for survival located at the base of the pyramid. These include food, water, warmth, rest, and security. The base of the pyramid is where we spend a lot of our money – on food, clothing, housing, utilities, transportation, and so on.
Basic Needs
Even within the basic need categories, there is a lot of variance. You could go to the grocery store and eat every meal at home, or you may almost exclusively go out to eat. Likely, it’s something in between. As you may already know, buying groceries and eating at home is far less expensive than eating every meal at a restaurant. You might shop at Aldi’s for groceries OR you may shop at Whole Foods – yet another price difference.
Your clothes could come from Kohls, or you may buy designer jeans. The choices are limitless. “Shelter” could be a 1,500 square foot home or 3,000 square foot home. The bigger the house, the higher real estate taxes, utility bills, and often homeowners’ insurance cost. Although the fun factor increases with a private swimming pool, expenses are also higher.
Wants
It is within the physiological needs that “wants” actually emerge. You need a roof over your head, but you want a spacious house with top-of-the line appliances, renovated bathrooms, and a finished basement. Even if that house is within your financial reach, you must recognize that it is a want, not a need. You could “get by” in a smaller, older home that doesn’t have a finished basement.
Allie Casazza is one person I admire. She is a mom of four young kids, and she said “enough is enough” a few years ago. Allie cleared out her kids’ toy room and adopted a minimalistic lifestyle. Through her Purpose Show podcast and online courses, Allie teaches other mothers how to clear the physical and emotional clutter.
Trade-Offs
Recognize that every financial decision has a trade-off. Spending an extra hundred dollars now means you are not putting that money into savings. Or, if you were going to spend the money regardless, you must choose where to spend it. Budgeting, in its very simplest form, is allocating the money you earn. When you increase one expense account, you are decreasing the allocation to another expense account. You may be tempted to give less to charity as your family’s lifestyle grows.
Additionally, there’s a delicate balance between funding short-term needs (and desires) and saving for long-term goals like retirement. For young adults especially, it can be difficult to sock away money in a 401(k) plan or IRA because the timeline for retirement is so far away. What works for you may not work for your best friend or neighbor.
Did any of my examples really resonate with you? Have you been spending more money on food, clothing, or entertainment than is truly needed?
Guiding Kids
Even if you clearly distinguish wants from needs, this is the perfect time to help your kids embrace it. Does your son or daughter understand that a necessity is different than a desire? Although allowance rates have increased according to the AICPA, this New York Times article indicates that children are not saving for long-term goals. Bill Dwight, founder of Fam Zoo, teaches us how to fix the way we’re handling allowances.
At this point, I’m not asking you to downsize to a smaller home or cut your food expenditures in half. I simply want you to be aware of the difference between true needs and desires. I’m also encouraging you to engage in an honest conversation with your child about this topic if he or she is old enough to understand.
In the next article, we’ll talk about spending money on experiences rather than tangible items.
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