Often young investors find it difficult to allocate money towards their investment portfolios because they have a tough time determining the differences between their wants and their needs. In reality, though, the difference between wants and needs is quite simple and the sooner you understand what a true need really is, the easier it will be for you to start investing your discretionary money.
Now, do not get us wrong. We are absolutely not trying to tell you that you should only purchase the things that you really need. In fact, life would be much more boring if we only made purchases according to our needs (although some truly committed people use this as a temporary money-saving strategy!). Feel free to treat yourself when you can afford to do so! We are simply trying to make the point that all of the money that you are not spending on your explicit needs should be considered your “discretionary money” and that this money can make a big difference in your life depending on how wisely you use it.
To better see your spending laid out, try a quick test. Make a little T-chart with one side labeled “wants” and the other side labeled “needs.” Fill the chart with all of the things that you have bought in the last month (or even in the last week if you tend to make a lot of purchases), deciding which items fit into which categories. For all of you who consider yourselves visual learners, this will be a good exercise for you to note and analyze how many purchases you actually make. Remember: while food and water are necessities, a $100 dinner out with your friends does not really fit into the “need” category. Try to be realistic while completing this exercise. Next, analyze your T-chart. For many of us, it should seem pretty clear that we really do end up fulfilling more of our wants than we realize. This might be surprising to some of you. That is because one of our biggest money-spending mistakes is that we tend to compare ourselves to others and feel deprived or inadequate when we cannot afford something that we really want. However, we tend to over-estimate the amount that others can afford relative to ourselves and feel “poorer” than the majority – when in reality this is a misperception. By looking at all of the wants that we have been able to afford, we may be better able to see how much we really can do with the money that we have.
Now, this is where the turning point comes. Consider the wants that you have fulfilled and decide how important investing is to you relative to those wants. If you’re reading this article, chances are that strengthening your investment portfolio is one of your major priorities. So, next time you are thinking about making a purchase for one of your “wants” – consider investing that money instead. Either way, you will probably be fulfilling one of your wants and the money you invest could grow enough for you to fulfill even more wants in the future! By making a plan as simple as this, you will be surprised by how much money you will allocate to your investment portfolio simply because you understand the difference between your wants and your needs.
1. Understand the difference between wants and needs – and think about this difference each time you make a purchase.
2. Treat yourself when you can afford to do so and appreciate the things that you have.
3. Make a plan for allocating some of your discretionary money into your investments.
4. Stick to your plan – even if it takes you a long time to do so.