Baby Step to Financial Freedom #12
I'll explain this next step by way of an example. I know a family of four that lives in a large, beautiful home. Kids' toys multiply like horny rabbits, spilling out of their huge playroom. Both mom and dad drive late model cars. This two-income family owns a recreational vehicle they rarely use because they're too busy to leave home.
The parents tell me their number one priority is spending time with their two young children. Unfortunately, their children spend more awake hours with a daycare provider than with their loving parents.
Mom wants dad to work more so she can quit her job and be a stay-at-home mom. Dad wants mom to continue working so they can pay down debt and build some savings. Despite earning a higher than average combined annual income, they often argue about money. Worse, they feel stuck, unable to do anything about their current financial situation.
Clearly their personal priorities are out of whack with their finances. They want to spend more time with their children, but they believe they need to work more, earn more, to take care of their financial needs. And their financial "needs" keep growing.
The problem, as I see it, is they don't know the true difference between their needs and wants.
Do you? Let's uncover the truth...
1. List your basic needs categories: food, shelter, clothing, transportation.
2. Imagine that you and your family are currently staying in a homeless shelter, eating at the soup kitchen, receiving government assistance. Now, imagine that you earn just enough income to rent a small apartment and buy your own groceries. Add roundtrip bus fare for your work commute. Write down your bare bones monthly costs.
(Example, based on data collected for a family in the lowest income category):
Food = $254
Shelter = $627
Clothing = $71
Transportation (public) = $12
Total Monthly BASIC NEEDS = $964
3. Write down your own expenditure numbers from Baby Step #4: Where Does Your Money Go? Tips and Tricks for Tracking the Flow for these same needs categories.
4. Subtract your bare bones costs (#2) from your own expenditure numbers (#3). The results are your basic wants.
Example (using the family I described earlier):
Food: $1027 (spend) minus $254 (need) = $773 (want)
Shelter: $3280 (spend) minus $627 (need) = $2653 (want)
Clothing: $457 (spend) minus $71 (need) = $386 (want)
Transportation: $1613 (spend) minus $12 (need) = $1601 (want)
Total Monthly BASIC WANTS = $5,413
5. Similarly, separate the rest of your expenditures into needs and wants. Be brutally honest! It might look something like this:
Kids' Toys: $200 (spend) minus $15 (need) = $185 (want)
Tobacco/Alcohol: $123 (spend) minus $0 (need) = $123 (want)
RV: $250 (spend) minus $0 (need) = $250 (want)
Cable TV: $70 (spend) minus $0 (need) = $70 (want)
Let's return to the story of the family I told you about above. Hypothetically, if they reduced their material wants as outlined in my examples, they'd save at least an extra $6,041 a month ($72,492 annually)-- easily enough to afford one parent the option to quit their job and pull the kids out of daycare. On top of this, If one parent stayed home, daycare expenses would be eliminated. If their top priority is to spend more time with their children, clearly they can afford to do so.
I'm not advocating that you get rid of all your wants-- heck, what fun would that be? In fact, I personally choose to spend more on wants than I do on needs.
Live your life in accordance with your priorities and values. Uncover the role that needs and wants play in your financial life. Realize that your life is full of choices. Reaching your goal is simply a matter of taking care of all the little details, one Baby Step at a time.
Coming next... I will share my own needs versus wants evaluation plus a few personal illustrative stories. Then I'll share instructions for the next Baby Step: Craft A Budget That Fits Your Needs AND Wants. Rather than restricting your fun, a well-crafted budget will offer you more financial freedom. Don't miss anything: Subscribe to receive free email or RSS notifications every time I publish something new.
Did you miss a step? Want to learn my recipe for success, happiness and a million dollars? Start here: Baby Steps to Financial Freedom.