Is Separating Wants from Needs a Key to Financial Freedom?

[Retired To Win]

When I started planning in 2009 for a financially independent retirement, I was very clear about one thing. For me, this was all about time. About shortening as much as possible the time I would have to spend in a daily commute-and-work grind. About freeing as much of the time I had left on this Earth -- which is limited for all of us -- to do what I wanted to do and not what somebody else assigned me to do.

It was my focus on the overriding priority and importance of time over other considerations that got me free. I reasoned that if this was about time then it was not about accumulating (or holding onto) unnecessary things... or about keeping up with the neighbors... or about indulging in lots of optional cost-ridden activities.

And what I did to stay focused was to specifically and clearly separate and keep track of my basic living costs and the costs of my wants -- in writing and frequently. By doing this, I was able to so lower my financial freedom budget -- AND accelerate the growth of my stash -- that 4 years later I had reached my goal.

When I started this journey in 2009, I had "perceived" personal annual expenses of $33,280. By 2013, I was FREE... free with yearly personal basic living expenses of $15,000 net of income taxes.

My time is now mine (and I actually have ended up with plenty of "extra" income to fund lots and lots of "wants").

What about you? Do you separate your wants from your needs mentally? In your budget? If so, is that helping you reach your financial goals sooner?

[Petunia 100]

Sure it is, it's a key to any financial goal.

I enjoy your posts, Retired To Win. I think what you have accomplished is amazing.

[Retired To Win]

The real key, though, is a mental one. I had to learn to tell the difference between needs and wants, which is not necessarily that obvious in our consuming-driven society. It was and is vital that I not mix and mingle — that I not confuse — my basic costs of living with the price tags for my discretionary toys and playtimes. Recognizing and acting on the difference cut years and years off my working life, and made attaining financial freedom much much more doable.

A vehicle or a status symbol? I need a reliable pick-up truck for a vehicle, and I have one in a paid-for 1996 Dodge Dakota that I’ve kept in great shape. Recognizing that I do not need to trade it in for a newer $30,000 truck (even if I wanted one) has kept my basic living expenses from increasing by at least $3000 a year — and saved me from having had to work an extra two years to accumulate the capital required to fund that $3000-a-year expense.

A newer truck or two more years of my remaining life lived in financial freedom? For me, it’s a no-brainer. How about for you?

A house to live in or to show off? I need a modest-sized house (1500 square feet for 2) with a garage and a workshop on a couple of acres or so (because I learned the hard way I need to not have in-your-lap next door neighbors). But in 2009 my wife and I owned a much larger house in a suburban community plus a 100-acre vacation property. At best, we used (needed) half the space in the house; the other half we just wanted for show. The vacation property we obviously did not need at all, and ended up wanting to visit it less than 12 days a year. An unexamined financial picture had kept us tied to both those places.

Four years later, we’ve sold both properties and used the profits to acquire mortgage-free the right-sized house we really need in a more rural setting that’s also more pleasing to us. Recognizing that we did not need the bigger house or the occasionally used vacation property reduced my basic living expenses by $8500 a year — and saved me from having to work an extra five-and-a-half years to accumulate the capital required to fund that $8500-a-year expense.

A bigger house or five-and-a-half more years of my remaining life lived in financial freedom? To me that’s also a no-brainer. How about you?

[disneysteve]

I think failing to distinguish wants from needs is one of the biggest things that gets people in trouble. Listen to Dave Ramsey or watch Suze Orman and you see this in action regularly. Even reading posts here at SA it's very clear that many people don't make that distinction.

Yes, you need a dependable car. No, you don't have to spend $30,000 (or even $20,000) to make that happen.

Yes, you need to get your kids a good education. No, you don't have to spend $15,000/year on private school.

Yes, your kids need clothes. No, you don't need to go to every designer store in the mall to get them. Goodwill, Salvation Army, yard sales, and other thrift shops are a treasure trove of good quality and inexpensive clothing, as well as toys, games, books, and more.

Yes, I believe that vacations are a need to some extent, but that doesn't have to mean a $10,000 luxury vacation in Disney World. I take my family to Disney every year and we spend under $2,500 for a week.

It's all about mindset for sure. If you convince yourself that something is a need, you're heading down a dangerous path.

[bjl584]

I'd say separating wants from needs is "a" key to financial success. Probably not "the" key or the only key. It is definitely a very important piece of a big puzzle however.

As Steve pointed out, there are a lot of folks that come to this forum and make posts about their $40,000 car, their $30,000 wedding, their $5000 engagement ring, and their $8000 vacation. In their minds, these things are all non negotiable "needs." Definitely a dangerous mindset to have.

[97guns]

i have a friend that is retired, he'd been doing great with rental properties that produce over 9K a month but bought a large $750K house to live in. ths is a guy that likes to keep up with his mucky muck friends who all have big boats, nice rv's and big homes, now he's under a lot of stress due to a 5K/month mortgage, his retirement may actually be in jeopardy, bit off a little too big a chunk.

[JoeP]

For virtually every purchase, you have quite a bit of latitude as far as price goes.

In some cases that price is $0. For example, we pay $0/mo for cable TV. No, we don't steal it, we don't HAVE it. So while we could have it and pay anywhere from ~$30/mo up to a couple hundred, we decided the lowest end works for us.

As Steve pointed out, weddings can be expensive, or not. Depends upon where you want to position the spend indicator. Our $4k wedding was perfect for us. If we spent less, it would have been just as good, but maybe lighter on the guest list or food selection or location. If we had spent more, I doubt we'd be "happier" now, and it might have very well hobbled us enough financially to cause marital stress or not have the money (we would have had a bigger loan) for the car we needed.

I tend to lose my patience when I hear people on Dave Ramsey calling to look for ways to avoid filing bankruptcy or answering to debt collectors, just because they were unable to differentiate want from need, or didn't apply some common sense when it came to spending.

[Retired To Win]

I think failing to distinguish wants from needs is one of the biggest things that gets people in trouble. Listen to Dave Ramsey or watch Suze Orman and you see this in action regularly. Even reading posts here at SA it's very clear that many people don't make that distinction... It's all about mindset for sure. If you convince yourself that something is a need, you're heading down a dangerous path.

Basic need or optional want?

I can now cover all my basic living expenses on $15,000 (net) a year and still have a jolly good time enjoying my freedom to hike, bike, canoe, read, blog, movie watch, video game, listen to classical music, and more.

If I want to have even more fun, I’ll spend more money — other money — on civil war tour trips, national park camping trips, eating at restaurants, snow birding in Florida for the winter, driving off into the country, tackling home or truck improvement projects, and whatever else may strike my fancy. But I am crystal clear that these are all wants. The money I spend on them is separate from what it costs me to meet my basic living expenses. I don’t need the wants. And I don’t let them morph into needs — or even quasi-needs — by letting them slip into my baseline living expense calculations or budget.

How do you keep your wants and needs financially separate?

[JoeP]

How do you keep your wants and needs financially separate?

Easy: separate bank accounts.

Our "needs" expenses come out of our savings and checking accounts, which get refilled from our salaries. But on the side, a portion of those salaries gets direct deposited into non-needs funds, each with a dedicated purpose.

For example, one is called Trip/Project, which is used for occasional family trips and home improvement projects. We won't go on a trip unless we have the money, and we won't replace carpet or paint the porch or buy furniture unless we have the money.

Of course, we still have the EF, which is completely independent and has very specific rules.

[Weird Tolkienish Figure]

The question is what is "financial freedom"?

This could mean different things to different people.

[Retired To Win]

Easy: separate bank accounts.

Our "needs" expenses come out of our savings and checking accounts, which get refilled from our salaries. But on the side, a portion of those salaries gets direct deposited into non-needs funds, each with a dedicated purpose.

For example, one is called Trip/Project, which is used for occasional family trips and home improvement projects. We won't go on a trip unless we have the money, and we won't replace carpet or paint the porch or buy furniture unless we have the money.

Of course, we still have the EF, which is completely independent and has very specific rules.

My approach is the same. I have 4 bank accounts: monthly expenses, health reserve, emergency reserve and discretionary fund. Income comes into the monthly expenses account. It, and the health and emergency reserve accounts are kept "topped off" at predetermined levels. All surplus income beyond that is moved to the discretionary fund account. It is the discretionary fund account that pays for fun and toys.

[JoeP]

My approach is the same. I have 4 bank accounts: monthly expenses, health reserve, emergency reserve and discretionary fund. Income comes into the monthly expenses account. It, and the health and emergency reserve accounts are kept "topped off" at predetermined levels. All surplus income beyond that is moved to the discretionary fund account. It is the discretionary fund account that pays for fun and toys.

We contribute to our EF to offset inflation, and this is done every pay period without exception. So the account simply keeps on growing. When a pay bump occurs, we spread the increase across all direct deposit accounts.

One mindset that trips up some people is the fact that you are not required by law to invent creative ways to spend your discretionary account. There may be times when you simply do not have a need to tap into it, and when you eventually do, avoid looking at the balance as a spend goal. Look at what you want to spend, THEN look at the balance, but don't feel the need to increase your expense just because you can.

Example: You want a TV. The size you want is 65" because it has the features and size you want. It costs $1200. You have $2300 in your discretionary account. Don't change your requirements to go past $1200!

[Retired To Win]

The question is what is "financial freedom"?

This could mean different things to different people.

To me, "financial freedom" means being able to pay for my living expenses (and my fun) without having to hold down a job.

Even though my passive income is more than 3 times $15,000 a year, it gives me a tremendous sense of control and peace of mind to truly recognize that my personal baseline living expenses are $15,000 a year. The rest of my money spending is optional, discretionary, for fun and unnecessary. So I keep it separate — and pay for it out of a discretionary FUND — in order not to confuse myself into thinking that I actually need a lot more than $15,000 a year to be financially independent.

Have you thought of looking at it that way? How much income do you really, really need to declare yourself financially independent and start living free?

[corn18]

The relentless pursuit of getting everyone to think your way. Not everyone wants to live on $15,000 a year. Works for you. Happy for you. Will you ever acknowledge that your way is A way and not THE way?

[97guns]

The relentless pursuit of getting everyone to think your way. Not everyone wants to live on $15,000 a year. Works for you. Happy for you. Will you ever acknowledge that your way is A way and not THE way?

the message he is trying to convey is that work = slavery and you need to break the chains
as soon as possible.

why do you work? to survive? can you stop working and survive? if you work just to exist
you are a slave

save enough then use the savings to earn a minimal living expense, the key is to have your
savings make your living expense so you never tap it.