Managing Your Money

Needs vs. Wants Hedonic treadmill Economists have coined the term "hedonic treadmill". It works like this: 1. You really want something (big screen TV, dining room set, iPod, car, house). 2. After much craving, you buy the item. 3. You're thrilled for a short while. 4. The thrill fades. 5. You start to feel empty and crave that emotional high, a sense of accomplishment or of "being good enough." 6. You decide that what you REALLY want is something else (refrigerator, designer suit, jewelry, vacation, deck). 7. The whole thing starts all over again. One of the biggest factors that keep people on the hedonic treadmill is the tendency to compare their lot with others' – “keeping up with the Joneses” (see Attitudes/Behavior) -- keeping up with the material acquisitions of those around us. If, however, we decide to step off the treadmill for financial and emotional sanity, we may still face social pressure from family or friends who are on this treadmill themselves or who may have different financial priorities or philosophies. Whether we don't have money because we’re trying to get out of debt, got laid off or just had a new child, it's easy to be influenced by friends and family who spend freely. Feeling like the “odd man out” can be painful, and we need ways to cope: • Appearances can be deceiving. Friends may be subsidized by parents or wealthier siblings, or may be relying on credit cards and loans. We can get trapped in the illusion of how our lives ought to be. • You’re not the center of attention. When we feel different in any way it feels as though others are focusing on us. Most people are concerned with and wrapped up in their own lives; they aren’t paying that much attention to ours. • Be honest. Admit, 'I can't afford to do this, but I do want to spend time with you.” Suggest a dinner at home, a trip to a museum, or a free concert. Friends would rather you care about them more than about what it is you’re doing together. • Have the courage of your convictions. • Move past your fears. When we change our financial habits and practices, we may be afraid that friends and family will be insulted or think we’re cheap. When we can't distinguish between real needs and mere wants, we’re constantly talking ourselves into spending too much. An example is: We need food. We want prime rib. It’s more the little things, such as eating out, that we “splurge” on, as opposed to big-ticket items that often prevent us from reaching financial goals. Consumers have also expanded the list of things they deem to be necessities; for instance, a microwave oven, an air conditioned car, a home computer and a cell phone. However, the majority also believe they should be saving more. A recent survey found that almost one quarter of Americans feel that their most important financial goal is just keeping up with bills. Another quarter said their biggest undertaking is paying down debt. Meanwhile, saving for retirement, putting kids through college, and purchasing a home ranked further down the list. From the Pew survey on Americans' spending and saving habits: Which kind of expense do you splurge on the most? Expense Percentage Food and dining out 25 Entertainment and recreation 17 Shopping and personal items 15 Home and housing 7 Children and schooling 7 Bills and utilities 4 Cars 3 Medical 1 Other 4 Nothing 14 Don't know 6 Note: Responses total more than 100% because respondents could offer more than one answer. Source: Pew Research Center What do we actually need? 1. A roof over our heads. We don’t necessarily need a house as nice as the one we live in; in many cases, we could make do with something smaller or older; therefore, probably half of our mortgage payment is a need and half of it is a want. The same is true of homeowners insurance; many people’s homes are over insured. 2. Food and water. Most of our food bill should consist of staples and basic needs. If you pay for your water, obviously that bill is also a need. 3. Clothing. “Wear it out or do without.” Start with a basic quality wardrobe and buy to mix and match; this can multiply your wardrobe as much as tenfold. Quality (not necessarily inordinately expensive) clothing will last longer. (See Clothing & Personal Care) 4. Basic hygiene and health. This spending is largely needs-based; however, many people do spend excessive amounts on hygiene products. Don’t be misled by marketing “hype”; for example, how many “nutrients” can there be in one shampoo? 5. Electricity. Even though this is a basic need, we still have some control over the expense. Turning off lights when leaving a room is one way. For other tips, see Utilities. 6. Heat in the winter or air conditioning in warmer climates. These are certainly needs in the more extreme climates. As with the other needs, there are ways to control these expenses; see Utilities for some suggestions. 7. A stream of income to pay for the needs. In our current society and economy, rarely can a family survive without both members of a couple earning income. 8. Transportation. Regardless of the type of transportation (car, bus, train), unless you live within walking distance of work and shopping, this is a necessary expense. For some help with managing this expense, see the Transportation section of this book. Everything else is a want. When we look at the few things in our life that are actually needs, we can see how many things we buy simply because we want them and how much fat we can really cut. For instance, if you already pay for a cell phone, high-speed Internet and have a computer with a microphone and speakers, you might consider Skype. This would replace a land line phone. Also, consider getting a prepaid cell phone, which would reduce the cell phone expense as well. The objective is to realize how much of your monthly spending goes toward wants. Wanting things is normal and fine as long as you’re not abandoning sound financial responsibility just to maintain the things you want. Eliminating some wants and focusing more on the most important things leads to cuts in spending and big changes in spending choices. This results in more cash and/or savings. (Try this: Divide all your spending into needs and wants. For every dollar you spend on a want, put a dollar into savings for the future.) The benefits of changing spending habits are more time to give to others and more money to save. We gain a sense of control and optimism about our financial future. We learn what we can live without and how we really want to spend our money. All of this results in a peace of mind that previously eluded us.