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The greatest downfall for many individuals and businesses is confusing “wants” with “needs”. This often leads to spending beyond their means, resulting in a life of debt. Many people and businesses appear to be doing well, even claiming to be “millionaires”, but in reality, they are deeply indebted. Understanding the difference between wants and needs is crucial for financial well-being.
For students of business and accounting, this distinction is fundamental. Businesses, like individuals, must prioritise needs to ensure long-term sustainability and profitability. A business that mismanages its resources by focussing on non-essential “wants” over critical “needs” will face the same consequences as an individual: financial instability and potential failure.
This principle is underscored in accounting, where the accurate categorisation of expenditures is essential for creating sound financial statements and making informed decisions. Recognising the difference between wants and needs enables businesses to allocate resources effectively, control costs, and ultimately, achieve lasting success.
Needs vs wants: Understanding the difference
Needs and wants vary between individuals and businesses. Human needs are essential for survival and include things such as food, which provides nutrition to maintain health; clothing, which provides protection from the elements; and shelter, which is a safe place to live. Business needs are those things that are critical for the business to continue to function, such as raw materials, labour, and a building or office space.
Wants, on the other hand, are things that make life more comfortable or enjoyable but are not essential for survival. For a person, wants might include expensive gadgets, designer clothing, entertainment, and unnecessary services. For a business, wants might include things like lavish office decor, unnecessary travel, or excessive advertising.
Wants mistaken for needs in modern society
In today’s society, wants are often mistaken for needs. Advertising and social pressure convince us that we need the latest technology or fashion to be happy and successful. This leads to a cycle of consumption and debt, as people strive to acquire these non-essential items. Social media plays a significant role in this confusion.
Platforms are filled with images of people enjoying luxurious lifestyles, creating a sense of inadequacy for those who cannot afford the same. This phenomenon fuels the desire for material possessions and experiences, which are often perceived as essential for social acceptance and self-worth. Furthermore, marketing strategies often blur the line between needs and wants.
Companies use sophisticated techniques to create a sense of urgency and scarcity, making consumers feel like they need a product or service immediately. This can be seen in the way smartphones are marketed.
While a basic phone is a need for communication, the latest smartphone with all the bells and whistles becomes a “want”. However, advertising convinces consumers that these advanced features are essential for staying connected, being productive, and not being left behind.
A family facing economic difficulties
Consider a family facing economic hardship. The primary provider has lost their job, and the family’s income has significantly decreased. They now have to make tough choices to make ends meet. This situation forces each family member to confront the difference between wants and needs. They can no longer afford their previous lifestyle and must make changes in their spending habits.
For example, the family may have to sell their second car, cancel their cable subscription, and cut back on eating out. The children may have to give up extracurricular activities or get part-time jobs to contribute to the family income. This experience can be a harsh wake-up call, but it also provides an opportunity for the family to re-evaluate their priorities and focus on what truly matters. It can also bring the family closer together as they work together to overcome the financial challenges.
Cutting costs and focussing on priorities
In this situation, the family has to cut costs. Here are some ways they can do this in terms of the basic needs: Instead of buying expensive, pre-packaged meals or eating out, the family can plant a vegetable garden to grow their own food. They can also learn to cook simple, nutritious meals at home, reducing their grocery bill.
Instead of buying new clothes, the family can learn to sew and repair their existing clothes. They can also exchange clothes with friends or family members.
If possible, the family can make their own repairs to their home instead of hiring contractors. The family will also find that many things they thought they needed to live comfortably are actually wants. Things like the latest phones, high-speed internet, expensive make-up, brand-name clothing and shoes, game consoles, multiple vehicles, fast food, and going to the cinema and events.
Cheaper and more beneficial ways to satisfy wants
The family can find cheaper and more beneficial ways to satisfy their wants. Instead of going to expensive cinemas and events, the family can have movie nights at home, play board games, and visit other family members and friends. These activities promote bonding, frugality, and appreciation for the little things. They also provide more opportunities for face-to-face interaction.
Instead of having the latest phones and data plans for each family member, they can use cheaper phones or limit data usage. The family can switch to cheaper products instead of expensive makeup and brand-name clothing and shoes. The family can use public transport or carpool instead of each member having their own vehicle.
They can learn to do things themselves instead of paying for services. This could include haircuts, home repairs, and car maintenance. They can also take advantage of free entertainment options in the community, such as parks, libraries, and community events. The family can also trade goods and services with others instead of spending money.
A business facing economic difficulties
A similar situation can occur when a business faces financial difficulties. For example, a company may experience a sudden drop in sales, increased operating costs, or unexpected debt. In order to survive, the business must also differentiate between needs and wants. Needs for a business might include:
Rent or mortgage payments: The company needs a physical space to operate.
Salaries: Employees need to be paid for their labour.
Utilities: Electricity, water, and heating are essential for most businesses.
Raw materials or inventory: For businesses that produce goods, raw materials are essential.
Basic marketing: Some marketing is essential to inform customers of the business’s existence.
Wants for a business, on the other hand, might include:
Luxury office furniture: While a comfortable workspace is nice, expensive furniture is not essential.
Excessive travel and entertainment expenses: These can be cut back without affecting the core operations of the business.
High-end company cars: More economical vehicles can serve the same purpose.
Large advertising budgets: While marketing is important, excessive spending may not be necessary for survival.
Bonuses: While bonuses can be a good way to incentivise employees, they are not essential for a business to continue to function.
By distinguishing between these needs and wants, a business can make informed decisions about where to cut costs. Here are some suggestions:
One area where businesses can often cut costs is salary expenses. This might involve downsizing, which means reducing the number of employees, or implementing salary freezes or reductions. While these decisions are difficult, they may be necessary to ensure the company’s survival.
Another significant expense for many businesses is office space. If possible, moving to a smaller office or allowing employees to work remotely can significantly reduce rent or mortgage payments. In some cases, businesses may even choose to vacate their office space entirely and operate fully online.
Marketing expenditures are another area where businesses can often find savings. While it is important to reach customers, there are many cost-effective ways to do so. Reducing spending on expensive advertising campaigns and focussing on more affordable methods, such as social media marketing or email marketing, can help businesses save money without sacrificing their ability to reach customers.
By prioritising needs and making strategic decisions about where to cut costs, a business can increase its chances of weathering the financial storm and continuing to operate in the long term.
Conclusion
Recognising the difference between wants and needs while focussing on priorities help individuals and families to achieve financial stability, even in challenging economic times. This requires a shift in mindset, from a focus on consumption to a focus on value and resourcefulness. This means making conscious choices about how money is spent, prioritising essential needs over non-essential wants, and seeking out ways to minimise expenses. It also involves developing skills such as budgeting, financial planning, and self-control.
Furthermore, a focus on value and resourcefulness can lead to a more fulfilling and sustainable lifestyle. By appreciating the things they already have and finding creative ways to meet their needs, individuals and families can reduce their reliance on material possessions and external validation. This can lead to increased self-sufficiency, resilience, and a stronger sense of community.
See also:
What is an account? A beginner’s guide
Goods and services – resale vs operational: The #1 difference every business student MUST know
ALICE: Assets, Liabilities, Income, Capital, Expenses
Accounting Cycle: Complete basic accounting in 8 steps
Goods for resale: Stock, Purchases, Sales, Carriages and Returns
Debit and Credit: Simple view of in and out
Increase and decrease of ALICE accounts
Expenses: Spending that’s direct, indirect, operating and non-operating
