Sometimes it can help to review the fundamentals underlying personal finance. A “back to basics” approach can help you re-evaluate where you are and where you would like to be. Just as you want to review your investment portfolio every so often, it is a good idea to do a little personal finance back to basics review. And one of most basic of all basics is understanding the difference between needs and wants.
Needs v. wants: a basic personal finance principle
Before you can prioritize your spending, before you can create a budget, before you can truly set effective and reachable financial goals, you have to understand needs v. wants.
Needs are items that you need to survive. These are things like food, shelter and clothing. They are the essentials. Needs can also be expanded to included things like utility bills (so that you have heat, etc. for your shelter) and even minimum debt payments if you are in debt.
Wants are items that are nice to have. They are not things that you need to survive. Sometimes needs turn into wants when you take your needs beyond the basics: for example, if you buy a home that is larger than you can afford.
Carefully go through your expenses and determine which are truly needs, and which are actually wants. Then order them. Remember that you should treat savings and retirement accounts as needs (after the survival essentials are taken care of), putting savings ahead of things like cable TV and eating out.
Living within your means
After determining your needs and wants, create a plan for living within your means. This is important to finding success in your personal finance situation. After all, living within your means is the most basic of all personal finance back to basics.