Wants & Needs - Island of Sanity

Island of Sanity



Economics

Wants & Needs


Two Ways

People and organizations have two very different approaches to budgeting. Let me call these the Want Method and the Need Method.

Wants

In the Want Method, in principle you proceed like this:

  1. Make a list of all the things that you "want", that is, all the things that you are considering spending money on.
  2. Some of these things will clearly be very important, while others will be more optional. For a household, the important things would likely include paying the rent and buying food. The options might include a vacation trip or a big-screen TV. For a business, the important would include such things as employee salaries and raw materials you need to produce a product. Options might be expanding into a risky new market or opening a new factory. Arrange all the things you might buy in priority order, from most important to least.
  3. Determine the cost of each item on the list.
  4. Take your income, and buy things from the list, starting at the top, until you run out of money.

In practice, people who use the Need Method don't necessarily actually write up the list on a piece of paper and carefully number all the items. Most people who use this method do it less formally. They only carefully assign priorities to a small number of big ticket items. Like, we figure out that after we pay for all the routine stuff -- the mortgage, the phone bill, groceries, etc -- we'll have, say, $5,000 left. So will we use that $5,000 for that big vacation we've been wanting to go on, remodelling the bathroom, or buying that boat?

Needs

The Need Method is conceptually simpler: You make a list of all the things you need. Then you buy them. If you have money left over, great!, you put it in the bank for a rainy day. If you don't have enough money, you search for ways to get more. For a family, this might mean looking for a better job, or if mom's not working, having her get a job. For a government, it might mean raising taxes. If all else fails, you may go into debt or seek some sort of assistance.

Comparison

People who practice the Need Method routinely think of themselves as being very cautious and conservative. After all, they're only buying the things they really need, and not a bunch of extra luxuries like those Want people.

The catch to this comes when you ask them how they define "need". If you mean, the minimum essentials for survival, then all that any of us really "need" is some basic food and protection from the elements. Perhaps you'd include medical care. While these things are a problem for some people, for the typical American or European, these real needs are easily met. We could manage to live in a cardboard box under a bridge, drinking nothing but water, and eating bread and beans. Surely you could survive in America for -- what? $100 a month? -- even without accepting any charity. Everything beyond that is some level of "luxury".

A store in my town that sells things like comic books and movie posters once ran a TV commercial showing a man sitting next to a pile of loaves of bread and jugs of water. A narrator then said, "If you only bought the things you really need, life would be pretty boring." They then went on to talk about their products, and concluded, "Nothing you need; everything you want."

Ask a Need Method person to make a list of the things he really needs to buy this year. It might include, say, new furniture for the living room. Why? Is your present furniture completely worn out? Couldn't you make it last one more year if you really had to? Even if there are tears in the fabric, couldn't you just put a blanket over it? Indeed, surely you would not die if you had to sit on the floor.

I'm not saying that there's anything wrong with eating steak when you could have survived on bread. Just that you should not confuse comfort or luxury with necessity. Not only is this insulting to people who make do with less than you, but if you really believe it, you are hurting yourself by ignoring many of your options. For example, we often think of paying the mortgage as one of the most basic necessities. But if you were in financial trouble, surely you could think of alternatives. Like, how about selling your house and moving to someplace cheaper, or even moving in with a friend or relative? From there it's a short step to realize that if you are not able to afford something that is very important to you, perhaps you should consider whether your present home is worth what it costs you. If, say, you really love to travel, perhaps you would be happier if you sold your big fancy house, moved in to a small apartment, and used the money you saved to go on those exotic trips. (At which point you'd be home less often, so the size and comfort of your house would be even less important.) To others, the most important thing might be to have the biggest, fanciest house they can possibly manage, and if that means they have to drive a junky old car and eat the most basic foods, that's fine with them.

Disaster

The real danger comes when you allow the idea of "need" to grow to the point where you consider all sorts of luxuries to be "needs". Many people have gotten themselves into serious trouble because they have decided that all these things are needs that they just move have, no matter what. Sometimes they run deeply into debt, and end up losing it all. Sometimes they stress themselves out trying to find ways to make enough money to meet all these "needs". In extreme cases, people have destroyed their marriages fighting over money, or turned to crime.

Most businesses use the Want Method. Most governments use the Need Method. Businesses generally realize that they have a finite income, and so they must manage expenses within this income. Governments generally view their population as an infinitely-taxable resource. There are all these vital needs that must be met, and so we have no choice but to increase taxes to pay for them.

Far better to frankly accept that, if you are an American or European, almost everything you want to buy is a luxury. It's just a matter of which luxuries are more important to you.

Blur

In real life people often use a combination of the two methods. I noted earlier that many people who practice the Want Method don't bother to prioritize the highest priority things, when they know they're going to buy them all. Like, most people manage to pay their mortgage and electric bill and phone bill and so on every month, so there's no point in going to a lot of trouble to decide whether it's more important to pay the phone bill or the electric bill: You're going to pay both in the end anyway. This is a convenient short cut and perfectly legitimate. But some people slip from thinking of these things as "my biggest wants" to thinking of them as "my minimum needs", and then they get into trouble.

That is, even some people who are very wise about their budgeting still live under the delusion that many of the things they are buying are "needs". They are just fortunate enough that these things are all so high on their priority lists that whether they call them "wants" or "needs", they would still buy them, and so it has no practical effect on their behavior. My point being: The fact that some people make harmless errors is not a rebuttal of the basic argument here.

© 2006 by Jay Johansen


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