When we set our monthly budgets or make a long-term plan for retirement, it's common to separate line items into three categories: needs, wants, and wishes. Then, we do the sensible thing and prioritize our needs. Once the mortgage, car payments, utilities, and grocery bills are covered, we move on to deciding if we can schedule a date night at that new restaurant. Maybe a weekend getaway will have to wait until next month.
This may seem like a responsible way to manage our money. But according to Sarah Newcomb, Ph.D., what we're really doing is conditioning ourselves to go without things that make our lives more comfortable, enjoyable, and meaningful. Dr. Newcomb believes that our wants and wishes are really needs as well. And if we start treating them as such, we're all going to start getting more from our money.
1. Reshuffling the hierarchy of needs.
If you ever took an introductory psychology class, the budgeting example I used above probably rang a couple bells. Abraham Maslow's famous "hierarchy of needs" describes how most of us cover our physiological needs (food, shelter) before worrying about our psychological needs (love, friendship) and then our self-fulfillment needs (meeting goals, being creative.). Maslow's hierarchy is also popular with many financial planners: we should pay for our homes and health insurance before we start thinking about sports cars and trips to Europe.
However, as Dr. Newcomb points out, our personal hierarchies are much more fluid than Maslow's rock-solid pyramid, especially when it comes to how we manage our money.
"When we learn to budget, we're taught that you need to know the difference between a want and a need," Dr. Newcomb says. "And the problem that I have with that is the assumption that if you don't need it to survive, you don't need it. But it's not Maslow's hierarchy of wants, it's Maslow's hierarchy of needs. Anyone who fasts for religious reasons is putting their need for meaning and for spiritual connection above their need for food, at least temporarily. Anybody who texts while driving is putting their need for connection and communication above their safety. We're constantly flipping the hierarchy on its head. And what this idea of knowing the difference between a want and need teaches people to do is to devalue the needs that are actually the most important to us. Yes, we need to survive, but without meaning and love and connection, do you want to survive? No. Those are the things that we survive for. So, to say that we don't need those things is to really create a plan for feeling deprived."
2. What’s your strategy?
I wonder if the mindset that Dr. Newcomb describes could be a reason that so many people are resistant to short-term budgeting and long-term financial planning. If we're stuck in a needs-first mindset, then it's possible that our budgets will keep saying "No" to things that don't keep our households running. Instead of focusing our energy on achieving positive, fulfilling goals, we focus on whittling down our lives. Whether you're planning for retirement or trying to improve your wellness, this kind of addition by subtraction just doesn't work.
Instead, Dr. Newcomb believes that once we accept that all of our needs are important, we can start moving away from a scarcity mindset and start using our money in more fulfilling ways. "Every financial strategy is an attempt to meet a fundamental human need," she says. "But you look underneath the strategy to find the need."
For example, a car isn't a need. Transportation is a need. A car is just one strategy to meet that need – a strategy that comes with a price tag that might be too high for a single 20-something who works from his apartment, lives near a bus stop, and wants to save to buy a house. Once that young man is a married 40-year-old with a house and two kids, a car might be a more effective transportation strategy, and therefore a more justifiable expense.
You also don't really "need" to spend $10 at your local coffee shop every afternoon. Maybe your coffee run is really a strategy that's addressing your need to take a break from work. A walk in the park might be a strategy that addresses the same need while also saving you $300 every month.
A new fishing boat and the associated fuel, maintenance, and storage costs might not fit your budget. But scheduling biweekly fishing trips where you rent a boat might be a more cost-effective strategy for addressing your need for some outdoor R&R. Maybe you supplement this strategy with a savings strategy that will build towards buying a boat once you retire.
Dr. Newcomb says, "If you do take the traditional route and just cut the thing off, say I can't afford it, you will feel deprived because what you've done is you've decided that whatever needs you're meeting, you're just not going to do that anymore. And that's why we all hate budgeting and that's why we never keep our budgets. The goal is to be able to manage your money in a way that you feel amazing now and later."
3. Living your best life.
Once you stop thinking about needs versus wants and start focusing on financial strategies, the conversation naturally moves away from buying stuff to having more meaningful experiences. Some of these experiences might be the smaller, everyday kind, like the art you hang on the walls so that you can experience beauty in your home. Others might require more long-term planning, such as purchasing your dream lakefront retirement home so that you can experience the tranquility you’ve worked your whole life to enjoy.
I think Dr. Newcomb is trying to help folks understand that these needs and strategies aren’t mutually exclusive. That’s a message we try to communicate to our clients at Keen Wealth too. Yes, safety and security during your golden years is the big end goal. But we also want you to use your assets to enjoy every stage of your life along the way.
"Economists talk about utility," says Dr. Newcomb, “the overall value that you get from something. And so you have to add up both the financial and the nonfinancial costs and benefits. What optimizes or maximizes overall wellbeing, not just what maximizes dollars in the bank. If it was only about maximizing dollars, we would never give gifts. There are so many things that we wouldn't do because we would only ever hoard dollars. But the goal is not dollars in the bank. The goal is living the life you want to be living. And the dollars in the bank, they can be used to support living your best life. But the first goal is figure out what that life is that you want to be living. Then you mobilize your resources to support living that life."
Sarah Newcomb, Ph.D., is a behavioral economist for Morningstar, a leading provider of independent investment research in North America, Europe, Australia, and Asia. She's also the author of Loaded: Money, Psychology, and How to Get Ahead without Leaving Your Values Behind. To hear more of Dr. Newcomb’s thoughts on needs, wants, and financial strategies, listen to this episode of the HerMoney Podcast.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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