My wife and I have a monthly financial review meeting where we sit down with all of our bills, credit card statements, and so forth. We go through everything together, item by item, and try to figure out where we can trim our spending. Most of the time, we’re in pretty clear agreement on things, but once in a while we disagree on the necessity of an item. What this entire discussion comes down to is a clear definition of our wants and our needs.
What are wants and needs? In a nutshell, needs are the things that you absolutely have to pay in order to live and avoid bankruptcy: housing payments, taxes, groceries, commuting costs, and so on. Wants are the things that you spend money on that you don’t explicitly need, like dining out or music.
As a rule of thumb, my wife and I allow each other a certain amount of wants in a given month, because life isn’t fun if you can’t have anything that you want. My wants are usually books, food, and occasionally music; hers are much more varied. By capping our wants at a reasonable level each month (and also with the peer review process on such spending), we often find ourselves saving quite a bit of money each month.
The tricky part is determining whether some of your spending is a have or a want. For example, let’s say we have beef burgundy for supper and in order to make it, we have to buy a new bottle of cooking wine (we generally buy pretty cheap wines for cooking wines, like “two buck Chuck”). It’s not explicitly a need, as you can prepare food at home without it, but it also really stretches the definition of want as well, as things like cooking wine enable us to prepare delicious meals at home that encourage us to eat at home instead of getting takeout or eating out, so in the long run buying a bottle of cooking wine is a money saver for us.
Here’s the process we go through to determine if something is a need or a want:
First, we list all of our spending that isn’t strictly essential in a month. Things that are essential are housing bills, most gas costs, staple foods, medical bills, insurance, and so on. These are things that we have to pay no matter what.
After we’ve made that list, we list everything that’s clearly a want. Entertainment and hobby expenses, dining out, and so on go under this category and immediately go on the want list.
This leaves us usually with a handful of things that we talk about – things like the cooking wine and so on. This process is more organic, but it usually comes down to the following question: would we have spent more money than this had we not purchased the item? With a bottle of inexpensive cooking wine, the answer is usually “yes,” because we likely would have eaten out more often without tools like that in the kitchen, thus costing us more in the long run. We use a similar philosophy to mark things such as CFLs as needs.
After this process, reviewing the list of wants helps us keep our eye on the financial ball each month. We usually strive to keep ourselves within our self-imposed allowance – and thankfully, we’re both usually way under the limit.