Needs vs wants

Key topic

This lesson is about needs and wants. We will explain the difference between needs and wants and the importance of prioritizing them because our financial resources are limited. It may sound easy in theory, but you would be amazed by how many grown-ups fail to distinguish between the two which in turn may lead to financial troubles. Remember that this information, when put to practice, offers valuable lessons for your future financial success.

Learning objectives

• Develop proper spending habits based on the concept of needs vs wants
• Learn the important distinctions between needs and wants
• Understand a method of identifying needs and wants
• Be prepared to deal with challenging financial conditions

Needs and wants

We all make tens of purchases of products and/or services every week. A cup of hot chocolate when going out with friends, a cereal bar before practice, a smoothie after, a new bicycle and so on. Naturally, we rarely pause to think the nature of our purchases. Here’s one way of doing this: everything we buy can be classified as either a need or a want. A need can be defined as something that you cannot live without, while a want is something that is not necessary for your survival but can lead to such feelings as pleasure, temporary happiness, a sense of fulfillment and satisfaction.

It should be pointed out that classifying purchases or would-be purchases into needs and wants is not always easy. This is because these two are not absolute categories. Something that for person A is a need, for person B it might be a want. Doesn’t sound right? Let’s look at an example. Both person A and person B are thinking about buying a $400 bicycle. For one this is a need, for the other, this is a want. How can you determine which is which? We need some context. Person A will be using the bicycle for exercise and pleasure. After all, they have a family car for getting to work and driving the kids to school and basketball practice. Person B on the other hand, does not have a car and the bicycle will be their primary means of commuting to work. Now we can easily determine that for person A, the bicycle is a want since they can easily live without it. For person B tough, the bicycle is a need since they will not be using it primarily for fun and pleasure, but for travelling to work.

Understanding if something is a need or a want depends on the individual. The individual can best determine for themselves if a purchase is a need or a want. At the same, this creates another problem. While we are the most suitable people to decide whether our purchase is a need or a want, we might give in to the temptation to disguise a want as a need. Therefore, we need to learn early on in life the skill of differentiating between needs and wants.

Differentiating between needs and wants

You must understand that “needs” and “wants” are two very different things. Needs are the things that you cannot live without, or living without them would cause hardship and distress; they may include housing, transportation, meals, healthcare, and any other means of simply surviving and living. You need a pair of shoes to practice your sport; you need to have a bed to sleep at night; you need to go to school every day and so on.

Wants are those things that go beyond needs, which of course you would like to have, but are not necessary for your survival. You want the new Ronaldo soccer boots; you want your bedroom to be filled with toys; you want to skip school sometimes and just go play in the park with friends.

The tricky part is identifying correctly what is actually a need, because quite often we tend to disguise wants as needs. Actually, differentiating between needs and wants is not as easy as it might first appear, due to the fact that a whole marketing science has been developed to influence our mindset and consumer behavior. Failure to differentiate between the two, causes many people to spend irresponsibly, leaving them unable to save, invest or having the ability at some point to enjoy their wants, even a little bit, which is always acceptable.

There is a simple rule you should follow: “Spend money on the things that you need before you spend money on the things that you want.” Spending your money following this rule does not, at all, mean that you should only buy the things that you need.  Life is meant to be lived, not survived. Treat yourself to some wants, but do so when you can actually afford them.  Good money management is all about covering your needs first and spending on wants after and only when you have extra money to do so. For example, spend your allowance on lunch at school and your bus fare to travel to and from school. When you have enough money spared, without sacrificing any of your needs, then you can purchase the new PS5 game you wanted or go to the mall with your friends and buy a new cover for your smartphone.

As a grown-up but as a teenager too, you will be faced with the conflicting choice of preparing for life ahead and the desire to live and enjoy the present. You need to find a balance between the two, often having to make compromises for the sake of your future. Start by understanding your spending habits and patterns, how much money you are spending on your needs and how much on your wants; something which will allow you to both save more money for the future and be able to spend money on things you want now.  Write down where you currently spend your money and try to go over your expenses on a weekly basis. That way you can easily catch things you have spent more than you have planned and adjust your spending accordingly.

The best money management habit to adopt is to always live and save within your means.  By adopting this habit, you are a step ahead when it comes to finances. The amount available for spending and saving is called disposable income. It represents any income you have earned which is available to cover your needs, spend on wants and save.

Living below your means actually means that what you spend and save during a given timeframe, a month for example, does not exceed your disposable income.  It is advisable to first spend money on your needs, save a good part of what is left, and use the remainder to fulfil wants.  It is quite important to strike a good balance between spending money on wants vs needs and to save enough for the future. Living above your means is when you spend more than your disposable income; usually that happens when you use credit and you get into debt.  Consistently living above your means builds up debt which can prove to be disastrous to your financial game plan.  This is one of the worse money management habits to have and it should be avoided. Living exactly within your means is when you spend all your disposable income on needs and some wants but you do not save any money at all.  Basically, this translates into uncertainty for the future, even if it does not create debt.

Learning to live and save within your means and knowing how to manage money, are some of the most important life skills you will ever master. Adopting good spending habits and sound saving strategies will guide you towards a better future. Watch this very short video as a further guide to distinguish between needs and wants and then discuss the content of the video in class:

Needs Vs Wants

The MoSCoW method

MoSCoW was developed by Dai Clegg, a software developer of Oracle UK, and is used by corporations around the world.  It is a system that helps people in project management to prioritize the requirements and tasks in a project. However, this being a helpful illustration of priorities, it became popular in many areas of every day life, including the process of distinguishing between your wants and your needs.  This method can be used if you are a student with a monthly allowance of $200, or a business man with a project of $1,000,000 in budget. It is self-explanatory, as you can see from the table above and all you have to do prior to making a purchase, is to decide if the item you are buying is something you must have, should have, could have, or otherwise won’t have.

1. Mo- Must have
   As the name suggests, this category consists of purchases that are “musts” for you. For example, you must have lunch every day. It is an important meal and vital for your survival and long-term well-being.
2. S- Should have
   Should-have purchases are just a step below must-haves. They are important to you but they are not vital. For example, you need Vitamin C, so you buy and drink an orange juice every day. Although it might look important for your long-term well being is not vital to your survival.
3. Co- Could have
   Another way of describing “could-have” initiatives is nice-to-haves. For instance, you may want to skip that cup of hot chocolate you buy after lunch. It would be nice to have it, but it is not important in any way. It will not make you healthier nor enhance your well-being.
4. W- Will not have
   These are very clearly wants and very far from needs. They leave no room for doubt into which category they fall. If you bought the brand-new smartphone last year, then wanting to buy the new one, again this year, is most definitely a luxury.

Action Steps – Exercise 1 (15 minutes)

• List 5 things you currently want to have in your life
• Using the MoSCoW method classify the above into the four different categories
• Discuss with the class the items in your list and their corresponding categories and justify their classification

Appreciate what you have

It is highly acceptable to be “hungry” for progress, development, achievements and owning things in your life. It is actually suggested that you maintain this level of being “hungry” throughout your life and in your sports career as well. At the same time, you should always reflect on the process of becoming who you are and having the things you set out to have, through your goals and be thankful and appreciative. Once you master the ability to be thankful and appreciate where you are in life, you will find that it becomes much easier to identify your needs and distinguish them from what you want; it will help you mature in the process and it will also help with your financial plan altogether. Otherwise, you will often deceive yourself into buying certain things that are wants and convince yourself wrongly that they are needs. Being grateful is a powerful tool in distinguishing between needs and wants. We will return to the concept of gratitude in a later lesson, in order to explain its importance.

Action Steps – Exercise 2 (5 minutes)

Let’s test what you took away from today’s lecture through a mini quiz. Please respond to the following statements with a True or False (T/F)

1. Having breakfast everyday is a need ___
2. Drinking hot chocolate every day is a want ___
3. Owning a car is a need for everyone___
4. The MoSCoW method is composed of five categories___
5. Distinguishing between needs and wants is usually clear. It does not depend on individual conditions and factors ___

Answer sheet

After the students complete the exercise, go over their answers and discuss them with the class.

Lesson wrap-up

Our focus for today was explaining what needs and wants are, but most importantly how to differentiate them. Needs and wants are very different things, although we tend to mix them up. This is why we need to develop early on, mental tools that can help us distinguish between the two. A very useful method is the MoSCow method which as we saw divides our purchases into four different categories. Finally, we pointed out the importance of being grateful and how it relates to the ability to distinguish between needs and wants.

At this point we will wrap up today’s lesson.  First, we will go over the learning objectives of this lesson and we want your feedback as to whether they have been achieved and then we will address any questions you may have.  Please feel free to ask anything you’d like in relation to today’s lesson and we would love to hear how the concepts we discussed today relate to you and your life!