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Money management: Needs and wants.

Saturday, February 20, 2010

I first learned about needs and wants more than twenty years ago in an Economics class when I was a Junior College student.  During the class, a female classmate told an irritating guy that he needed medication and asked if he wanted some.  That made the distinction between needs and wants very clear to us all and we had a good laugh.

There will always be things out there to buy in the modern world.  The question to ask is always whether we need these or we want these.  The question seems innocent enough at first glance.  However, one person's needs might be another person's wants. Do I hear some readers going, "Huh?"

Human beings have various needs for survival.  In my mind, at the most basic, we need air, water, food, shelter and clothing.  Some might say that the last item is debatable and it might be a want that has become a need due to the evolution of human society which invented the notion of modesty.  Here we start to see a blurring in the line separating needs and wants.  However, we should have an idea of what are needs and what are wants for us to do a good job of managing our money.

Recently, I was asked how much of my income do I save.  Off the top of my head, I said I probably save about 80% of my annual income and that received some incredulous expletives.  Is it possible?  Yes, it is.  How could we achieve this?  It is through a combination of increasing our income and reducing our expenses.  This post is about the latter.

In business, we very often hear how efforts are being put into increasing revenue.  Rarely do we hear how efforts are being put into decreasing costs.  Somehow, increasing revenue is more glamorous than decreasing costs.  It is when times are bad that businesses start decreasing costs in the hope of preserving their bottomline.  

I believe that cost control must always be an important consideration in business. Costs should always be kept low, in good times and bad.  This is especially true when we are looking at fixed costs or costs which cannot be adjusted downwards in the short run, at least not without incurring some kind of penalty or monetary loss.

Similarly, in our personal finances, if we keep our living expenses low, we do not have to worry during bad times if our income level takes a dip or, indeed, disappears over a period of time.  We would have ample reserves to see us through.  In the world of business, these are called retained earnings.

Making money is an important skill in modern society but managing money is an equally important skill and, very often, neglected.  We can make a lot of money but we can easily squander it all through mismanagement or, indeed, no management.

Do you believe me if I tell you I know of someone who made $10k a month but spent it all, habitually? Seemingly flying high, he had a really rough landing with a few broken bones thrown in when the wind was taken away from under his wings.

So, what we have to do is to have quite clearly in our minds what are needs to us and what are wants.  We should cut back on our expenditure on wants.  Sounds simple enough, doesn't it?  Maybe not.

As mentioned earlier in this post, the definitions of needs and wants can be quite subjective.  We need transportation but do we need to have a car?  For a businessman, he probably needs a car.  Or, indeed, do we need to take a bus if the destination is only a few stops away?  For an old granny, it's probably a need.  Defining our needs and wants, this is the tough bit and I leave it to you.

Assuming we manage to sort out our needs and wants, what's next?  Once we have amassed some "retained earnings", look at how to put them to good use.  It's time to increase our income.  A company that is sitting on a lot of cash and not doing anything with it is doing its shareholders a grave injustice.  Similarly, just keeping all our wealth as cash in a bank account is doing ourselves a great disservice.  That's another subject and if you are interested enough, you might want to read a couple of my earlier posts below.  Have a good weekend and I will talk to you again soon.

Related posts:
Grow your wealth and beat inflation.
Bungee jumping, anyone?
To queue for $1 parking fee redemption.

14 comments:

Dou said...

My friends once told me if u dun spend the money u have..basically it is NOT YOURS..hahaha

AK71 said...

Hi Dou,

Guess what, I keep some of my money at home in a tin can. I think I can safely consider that money to be mine. ;)

Jokes aside, I think we can always find reasons or excuses to spend money. Thinking that we have to spend money so as to prove our ownership is something I have heard before. I think it is rather twisted.

After all, upon spending the money, it's no longer ours, is it not? Best not to argue with your friends about it. :)

CL said...

haha nice 1...true to some extend...but once you need to build up a family thats when the true headache is...your $$ is never yours alone already...

AK71 said...

Hi CL,

Once the money is spent, it is no longer yours. Starting a family is a major financial commitment. A lot of money has to be spent. That's for sure.

However, you are gaining something in exchange just like with any other purchase. ;) As long as you feel that the purchase is good value for money and it is something you need, go ahead and spend the money. :)

Hubert wee said...

Not spending the money doesn't automatically mean that it's not yours. It only means that we could be setting aside that money for something else in the future, or for investing when the time is right.

AK71 said...

Hi Hubert,

Well said. We must always have "retained earnings" like any good company in order to seize opportunities if they present themselves.

la papillion said...

Hi AK,

Interesting. I've always heard of people trying to reduce their expenses instead of trying to increase their income. Perhaps we mix with different people :)

I believe you can save up to 90% of income. There's only so much you can spend on. Let's say you spend 5k. If you earn 6k, you save only 1k. If you earn 20k, you save 15k. It's not as simple as I sound, but the gist is that there's only so much cost you can cut and the upside to your income is unlimited (at least to me, hahaha)

AK71 said...

Hi LP,

We mix with different types of people? Perhaps. :)

As for what you said about how there is "only so much you can spend on", actually, if you think about it, there are many things we could spend on as well as the frequency of such expenditures.

I know people who would buy a new pair of shoes every two weeks, 30 new music cds every month, a new branded watch every two months, an overseas holiday every two months, a pair of designer spectacles every six months, a new mobile phone every year, a new notebook every two years, a new car every three years etc. You get the idea.

As for upside to personal income being unlimited, I cannot claim such a feat. :(

drizzt said...

astounding that you can save so much. i guess you must earn quite alot. i can only save 45% of my disposable and people already say i save alot liao.

AK71 said...

Hi drizzt,

LP believes that we can save up to 90%. So, I have to work harder. ;-p

I don't know if I make a lot of money. Many friends make more than I do. However, I am not much of a spender. I think that helps. :)

Anonymous said...

Chan said
I also about 60%

AK71 said...

Hi Chan,

You are also more of a saver, I see. :)

Ben said...

Hi AK,

Over the years, I realised that some people consider the previously want as need. One example is the sedan car which the people consider to be a "need" as a transport mean for ferrying the kids.

The above worth a penny for thought and analysis.

Ben

AK71 said...

Hi Ben,

Oh, for sure, I am not against car ownership per se.

See:
3 good reasons to own a car.

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