Budgeting Hacks

#23: Difference Between Needs and Wants – Stay Debt Free and Avoid Lifestyle Inflation

Today’s money hack is about differentiating between needs and wants in an effort to follow a frugal lifestyle.

We know money is important not only for survival but also for living a fulfilling life, and to completely abandon the idea of gathering wealth in an effort to be frugal, is a bit naïve. As we explained in our last article, frugality teaches us to spend carefully money and ignore social standards of success and happiness (among other frugal ideas), but during our quest for wealth, it’s vital to know when motives are fueled by greed or opulence instead of necessity and peace of mind.

Lifestyle inflation, what is lifestyle inflation, how to prevent avoid lifestyle inflation

In today’s world, many consideration​ monetary wealth and physical assets a sign of social respect, and that’s a pity because it encourages people to stay in the rat race and live a life they cannot afford without debt. As soon as a salary raise in granted at work, the money is spent on ‘new needs’ that materialize somewhat suddenly. This makes it difficult to save money over the years for retirement or for repayment of debt and one feels they are perpetually stuck in a state of financial insufficiency (which is the definition of lifestyle inflation).

At the end of the day, you may never be financially independent because your savings are not increasing as they should to guarantee a stress-free financial life.

Lifestyle inflation and debt repayment, difference between needs and wants

Differentiating needs and wants to avoid lifestyle inflation

To avoid lifestyle inflation, one must differentiate between needs and wants. A simple definition from any book on economics will tell you:

  • Needs are items necessary for survival, i.e. food, shelter, clothes, health, etc. You cannot live without purchasing these items,
  • Wants are items you desire to possess but you can do without them for the sake of survival, such as technology gadgets, branded items, expensive cars, luxury items, etc.

The line between needs and wants is often blurred. Someone’s ‘want’ may be another person’s ‘need’ and vice versa. The criterion is different for everyone, I admit, but what works for me is to ask myself if I really need to make a purchase or if I can live without it. While making this decision, I tend to think about the less fortunate folks living in third world countries and war zones and the difference between needs and wants become strikingly clear!

But what if you can afford a product or service that falls into the ‘want’ category, without taking out a loan that you spend your life trying to pay back? What if affordance is not an issue? Surely, it must be frugally acceptable to buy anything you want if you are financially secure, right? Well, it’s pretty simple:

  • Frugality advises that all purchases are made for personal convenience and not for the sake of show-off or opulence. Materialism is only a curse if it goes into excess and more often than not, the more you have, the more you waste.
  • Whatever you choose to buy, try to maximize the value derived from the money you pay, i.e. your shopping mantra should be ‘value for money’.

So define your principles and make sure you don’t cross the line to the other side of wasteful indulgence and opulence which often leads to debt and a lifestyle that you cannot afford.

Related: Helping your children develop good financial skills.

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6 thoughts on “#23: Difference Between Needs and Wants – Stay Debt Free and Avoid Lifestyle Inflation

  1. Great advice. Too often we NEED the latest smartphone when in reality our smartphone works fine but we don’t want to be ridiculed by our friends who all have the latest gadgets. Peer pressure in my opinion is what keeps too many people away from financial independence. If only we would buy things we value over what our friends value.

    • I absolutely agree. Peer pressure (keeping up with the Joneses) has a lot to do with our spending priorities and it only leads to lack of satisfaction with every purchase after a few months have passed by. Thanks for stopping by!!

  2. I definitely think that needs and wants become a bit of a gray area today. Seth Godin has advised people to think in terms of “people don’t buy what they need anymore.” People buy what they want! There is always room to cut out more.

  3. DC is right. Needs and Wants ARE in a gray area now. Today it seems like we can’t go without Netflix, the internet, and a smart phone. Those are quickly becoming “needs” it seems like for many. We all want to spend, spend, spend; no one wants to have the patience to save for anything anymore. It’s a shame too, because having “stuff” has no relevance to long-term wealth. Thanks for sharing this article!

    • I absolutely agree. It’s easy to blame the culture of consumerism on the confusion between needs and wants, but the truth is, every consumer ought to think about their purchases carefully before making them. More than half the world lives without smart phones, yet we consider them needs. Lots of soul searching to be done here…

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