This is how you create wealth: 2 steps to becoming rich

Warren Buffett once said, “If you buy the things you do not need, soon you will sell the things you need.”

Needs are those that are extremely necessary for living a healthy life. These can be personal, psychological, cultural and social needs that are key for survival - rent, housing, transport, food, clothing, medical expenses, etc. These needs are a person’s first priority as it determines the overall well being of an individual. Therefore, if needs are not satisfied in time, it may result in illness, inability in functioning or even death.

On the other hand, wants can be described as goods and services that are good to have but are not essential for survival. Wants are optional, that is, an individual will survive, even if the wants not satisfied. So, needs can be distinguished from wants on the basis of their level of importance.

Simply put, ‘Needs’ are required and ‘Wants’ are desired. This is a particularly delicate aspect of managing one’s personal finances since the primary activity here is spending. Our spending pattern has a significant impact on our finances and wealth. Therefore if we were to classify and differentiate our expenses as needs and wants, it would mean we are on the right path.

Our wealth, income or salary is usually a finite resource. Our ability to manage needs and wants impacts our financial well being dramatically.

When a need becomes a want
There are wants you can afford now but can be put off to a later date. For instance, we all know that an efficient smartphone is a need, some cant imagine life without it. We surely need one, we can manage with something that fits into our budget and use it optimally. This need becomes a want when you want to frequently change it because of a newer model or better-looking model even though your old phone works just fine. Upgrade only when the old one is obsolete.

Similar is the case with a car, another important necessity. We all need a car that can help us commute. Buying a car even when you don’t need it for daily commute is a want and not a need. Likewise the specifications and other features which add to the cost but something that doesn’t directly affect our usage outcome is want.

Balancing between needs and wants
Creating a balance between needs and wants is all about setting the right priorities. Knowing one’s priorities can help in controlling spending so that your wants don’t overshadow needs. This understanding of priorities along with a disciplined and controlled approach to spending can help in creating a balanced lifestyle. This approach is also essential for wealth creation and to avoid the pitfalls of debt and interest payments.

Here are a few ways to balance your needs and wants:
Separate needs from wants: Begin by making a list of all your wants and needs. Determine your priorities so that you can allocate the necessary resources to satisfy your most important needs and wants.

Avoid impulse buying: Avoid instant gratification. Think before you make that impulse purchase.

Evaluate your current spending: Most of the expenses that you currently have are probably merely wants. It’s justified to spend on wants that suit your lifestyle requirements. Eliminate unimportant expenses.

A rupee saved if invested with diligence, can increase wealth over time. Taking care of needs and managing wants will help one lead a satisfying, fruitful and stress-free lifestyle.

By Santosh Joseph

(The writer isfounder and managing partner, Germinate Wealth Solutions LLP)

Source: DNA Money