Needs, Wants & Will power

A need is something that is required or essential but a want is something desirable disguised as a need. Can you differentiate between your needs and wants? How much of you spending is on impulse or from a desire created by the media or possession of an item by a friend or colleague? Countless people fall prey to spending and living beyond their means and eventually all it takes is one strike to wipe them out. When it comes down to basics, we humans actually have very few needs: Shelter (house, clothing), Food. Socializing and the desire to reproduce come in a close second.

Marketing by definition is presenting a want as a need. Manufacturers rely on advertisements to consistently sell us products. Do you create a long-term budget (e.g. 5 years), a mid-term budget (1-year) and a short-term budget(1 month), write down your needs and wants. How much of your paycheck do you dedicate to your need, your family’s need, savings before you decide to fulfil a want. Getting a credit card is relatively easy, swiping it for goods is much more easier but paying back the large bill is a whole new game. I am not sure how credit cards are different from loan sharks? Many charge 20% plus a year and will lend you money way beyond your means in the hopes that once you are trapped, you will have no escape. Filing for bankruptcy is not always the answer here.

There are many articles out there that talk about getting out of debt, but very few that talk about living a debt free life. Credit-counseling and debt-consolidation are a multi-billion dollar industries. Even the 30 year home mortgage is setup to take advantage of an average home owner moving every 6 years. Every 6 years or so, a person buys a new home (usually larger and more expensive), finances with a 30 year loan, rarely puts 20% plus as down-payment and spends the next 6 or so years paying interest on the loan without really reducing the principal. There are pundits who advocate the tax benefit of paying interest which is BS I will leave for another time.

Here are some more examples:

1. Should I buy a house now? Depending on your situation you might actually be better off paying rent for a 2 bedroom apartment. Don’t buy a house because your friend just bought one.

2. Should I buy a new or an used car or lease? Should I buy a Lexus or is the Corrola good enough for me? Am I buying this car because it is something I have always wanted or is it because you want to show off to your family and friends. It is said that a vehicle loses 20% of it’s value, the moment a buyer drives it out of the dealers lot. Do you really want to pay the dealer 20% for the new car or can you buy an used car in a good condition 1 year old for 30% off. What is your budget and how much and how long will it take you to pay off the loan (remember a car loan is paid from after-tax income).

3. Repair the old computer or buy that new computer you saw at the store? Many times, repairing an item is better than purchasing a new one. What about that high-definition digital camera that your friend just bought? Do you need it or want it? And then can you afford it?

4. What is your buffer? Can you afford the same lifestyle after losing your current job? How long can you survive before you get the next job? What if the economy is in a recession and finding a job takes over 6 months? What about a long-term disability?

5. Gifts. Should you buy expensive gifts for everyone because you are scarred of what they might think? Or a nice card and/or phone conversation is sufficient? Will these same people be there in your time of need?

6. Should you buy that snow-blower or clear the the snow yourself or hire someone to clear the snow? A typical snow-blower costs $600 + annual maintenance costs. If help is hard to get or it snows often in your area then buying a blower might be justified. If you are in good health, a solution may be to barter with a neighbour. Promise to mow his lawn once a month in return for him clearing the snow in your driveway and sidewalk using his snow blower.

The rules of living debt-free are pretty simple: 

1. Always have a budget. It provides you a clear map of your income and expenses.

2. Avoid debt when possible. Its a leverage that could be good but over-leverage can also kill your finances. Know how much debt is tolerable for you.

3. If already in debt, make paying it back one of the more important needs. Do not take on new debt unless this one is reduced to a tolerable level.

4. Maintain a lifestyle that will sustain you even when you lose your job or have a reduced income for a year.

Feed the needs first, save for the long-term and only then look at feeding a want. One way to live is to have a clear understanding of ones needs and what is required to sustain those needs over a long period of time.