Think about the people in your life. Who is successful with their finances? Who seems to struggle with money? What differentiates them? You can bet its the purchasing decisions they make in their day-to-day lives. One friend lives within, or below, their means while the other makes sure they have the latest and greatest toy, their finances be damned!
Living within your means is a lifestyle choice. Each day you need to make decisions that will better your financial future. Buying an item on your credit card while knowing you will not be able to pay the credit card balance in full this month is a recipe for disaster. Knowing what you really need versus the things you want will keep you on track to your financial goals.
Wants vs Needs
What is a want? Simply, it is something you desire. But it may not be something you need. A need is required for you to survive. Before you even think of purchasing something you want, you have to make sure you have all of your needs covered. As humans, we all have the same basic needs, as discussed below based on Maslow’s Hierarchy of Needs.
Maslow’s Hierarchy of Needs
Have you heard of Maslow’s Hierarchy of Needs? It is a theory proposed by Abraham Maslow in 1943. Basically, it examines the needs of humans as a pyramid. Starting at the bottom, your most basic physiological needs, such as food, water, and shelter. These needs are what are necessary to survive. The next layer is regarding safety and security, such as employment for financial security. The pyramid continues with layers for love and belonging, self-esteem/self-worth, and self-actualization.
What Maslow’s Hierarchy of Needs demonstrates is that all of us have the same basic needs that are required in order to live a healthy and fulfilling life. The bottom of the pyramid is most important and things we need every day of our life to survive. As the bottom layers become filled, we move towards the top of the pyramid, trying to fulfill the needs in each layer, until we get to self-actualization. This is the desire to become the best version of ourselves and something we all continue to strive for every day.
How does this fit in?
What does any of this have to do with wants vs needs? Well it demonstrates exactly what we should be focusing on to make sure we live a life worth living. Continue filling your need buckets and avoid things that are temporary relief. Buying a new cell phone when you have one that works perfectly fine will not fill any of your real needs. When you are about to purchase something, ask yourself first if that items truly is required to fill your need layers. If not, it may be best to avoid the item for now until you need it, such as when your cell phone dies and it really is time to get a new one.
It is hard to realize things that are important to you are only wants. That you don’t need to have them. That you really shouldn’t buy them, especially when you need to prioritize your debt payoff. This is where a change in your mindset comes into play. Take a look at The Debt Mindset. Learning how to think like someone who has the financial freedom and wealth you want will begin your journey to your life full of riches.
My Struggle
Something that has always been a passion for me since I was young, and still is, are video games. I could sit for hours on end, day after day, playing any variety of video game and I still can. You could definitely say it was, and still is, an obsession and perhaps an addiction that I try to not let control me. So of course, when a new system or game comes out that is getting great reviews, I want to try it out.
The problem is that this does not fit with the goals that I have set for myself in my life. I would love to have a Nintendo Switch to play games like Legend of Zelda: Breath of the Wild or Animal Crossing: New Horizons. Yes I could afford to buy them, but spending hundreds of dollars along with the hundreds of hours I could invest in the game playing does not align with my goals. To many, this may not seem like a tough choice. It is just a video game after all, clearly a want, not a need. But to someone whose life for years was more or less focused around the next quest to complete in a game, it can be challenging.
Everyone has a different challenge. Mine is video games. Yours could be something expensive, like luxury watches, or something much smaller, like a Starbucks coffee. In order to be successful, you need to make your long-term financial goals your priority. Any dollar you spend on an unnecessary item is a dollar you can’t invest in your financial well-being. That dollar isn’t just a dollar. A dollar spent paying down debt is worth far more than just one dollar. Take a look at the article “The Most Powerful Force in the Universe: Compounding” to see how the joint power of interest and time, known as compounding, will either take you to new heights, or keep you down in debt hell.
Avoid Lifestyle Creep
As humans, it seems to be in our nature to spend what we make. The more we make, the more we spend. This, of course, is the enemy to getting ahead with your finances. Just because you make more money, doesn’t mean you need to spend it!
How do you avoid lifestyle creep? Easy! Make sure you pay yourself first! When you get a raise, how about increasing your 401k contribution rate? You were living without the raise before, so you can do without it now. As of 2020, you can contribute $19,500 a year in your 401k or $26,000 if you are over the age of 50. These dollar values, and the values below, are likely to change with each passing year and can be found on the IRS website. The closer you get to these numbers, the more your future self will thank you when you have the retirement of your dreams. Making sure you will be financially secure in your later years should be your #1 goal!
It couldn’t be easier! Pay yourself now and avoid the dangers of lifestyle creep. Down the road, thanks to compounding, you will have enough money to not worry about your finances and focus your attention on whatever your heart desires! Use this opportunity to start preparing for your dream life!
Dream Life
It will take you making daily sacrifices in order to dig out of your debt hole but I promise that it will be worth it when you are debt free and living the life of your dreams. Take the opportunity now to picture yourself where you would like to be a year from now. How about 5 years? 10 years? Dream big. Once you are debt free, you can start increasing your wants as long as they align with your dreams but do not lead you into debt once again.
Ten years from now I would like to be in a place where work is a choice, not a necessity. That is what financial freedom is to me. Choosing to do what you do. I want to make the most out of this one life that I am given. See the most beautiful places the world has to offer. To not be trapped under mountains of debt for the majority of my life, preventing me from enjoying every moment I have.
Develop Your Dream Board
As I have said before, it is easy saying “I want to be out of debt”. The problem is, you need to know your why. So get out and find your why. It is what will get you all the way to the finish line. Once you know your goals and dreams, write them down. Start a dream board. You will be making a promise to yourself. Just that small act of putting your dreams to paper will increase your odds of success exponentially.
My wife and I have a dream board. On it we have places in the world we want to see, different bands that we want to see live, and various financial goals we WILL achieve. Since starting our dream board a few years ago, we have been able to cross off quite a few bands and have seen some of the places while going to a few additional we never thought we would go, like Plitvice National Park in Croatia, a picture of which is at the top of this post. Crossing off “Pay Off Student Loans by 2020” was probably the most satisfying. Now we are onto the next goal of “Pay Off Mortgage”. We know our why, we have committed to ourselves that we will make it happen, and nothing will stop us!
So write down your goals and dreams. This is your time to be greedy. What do you really want in your life? Do you want that lake house with a boat? Who cares what the cost is now! Put it down! These are your dreams, reach for them. If you make that your singular goal, you will find a way. I believe in you. Now lets go get our dreams!
What Are Your Action Steps?
What are the main takeaways from these lessons? Write down the dreams you want to achieve in your life. Remember, understanding your why is paramount to your success. Evaluate your financial decisions. You are looking at these twofold. One, are the items you are purchasing true needs. If not, does it make sense to purchase the item or are your financial resources better used elsewhere? Two, does the purchase align with your goals and dreams. Does making the investment in the item get you another step closer to the life you desire? Taking these actions to every financial decision will keep your goals and dreams in focus and keep you on your path towards a life of fulfillment and happiness!