In a few earlier posts, notably, “Up from the Financial Treadmill” and “Pay Yourself First – The First Habit” we emphasized that the key to being able to save is “to pay yourself first” and be able to distinguish “needs” and “desires”.
Hardly anybody can argue the fact that expenses tend to increase almost in direct proportion to ones earnings. Thus, as earnings rise due to an increase in salary, expenses also rise and new expenses emerge out of the blue. The rise in expenses usually soak up the additional earnings resulting from an increase in salary.
In real life, I have heard countless of times, eligible bachelors in the prime of singlehood, complaining of their inability to save and naively suggesting that they may be able to save as soon as they get married (a case probably of jumping from the frying pan to the fire).
The fact is that most increases in expenses grow out of desires, not needs. And desires…they always expand and are practically limitless.
You and your spouse may content yourselves commuting by riding tricycle and jeepney while you are working as an employee in the country.
But as soon as you become an OFW with dollar expectations written all over, you will find the pressure to buy a vehicle too irresistible, regardless of whether you actually need it or not.
You and your spouse may also be unable to resist having one, two or more credit cards, having been chased and cornered by those ubiquitous “passersby chasers” (with credit card applications brandished and peddled like fish in a wet market) during your mall forays while on vacation in the country.
Thus, you and/or your spouse may splurge to your heart’s desire, throw caution to the wind and forget about saving or investing.
You will be held captive to the whims and caprices of the consumer market. You will be hostage to your own desires unless, of course, you protest and resolve to take your financial destiny into your own hands.
That is where you need to distinguish your finite needs from your limitless desires. But how do you distinguish needs from desires?
There is a rough but useful test to determine whether something is a need or desire. This is not rocket science but it serves the purpose of distinguishing most needs from desires.
The test is very simple. Whenever you are faced with the issue of having to buy or not to buy something or to take or not take a course of action that entails expense, ask yourself the question:
“Is there anything negative, harmful or adverse that can happen to me or my family if I do not buy, purchase or take this course of action?”
If the answer is yes (meaning there is a something harmful adverse or negative that can happen), then that something to be bought or action to pursue is a “need”.
If the answer is no (meaning, there is nothing harmful, adverse or negative that can happen) then that something to buy or action to take is just a “desire” which you may forego.
A couple of simple examples easily come to mind.
You are working abroad and you want to buy a house to be financed on installment. You do not have a house yet and your family has been renting an apartment for some time.
Is this a need or a desire?
Of course, it’s a no brainer. You need to own a house for obvious reasons, it’s a basic need you can only do away at your own peril, now or in the future.
You also want to buy a car at the same time since car companies are elbowing each other at your doorsteps to offer you zero interest installments. If you grab any of these seemingly irresistible offers, you will, of course, be facing two big installment expenses on two fronts.
Is this second one a need or desire?
Now apply the test. Ask yourself: Will something adverse, harmful or negative happen to me or to my family if I do not grab this wonderful opportunity of owning a car?
Of course not. This is out-and-out a desire.
You may find countless reasons to justify owning one at this time regardless of whether or not it puts your finances into a sinkhole and prevents you from saving upfront.
The fact is that we humans, with our inborn weaknesses, are very much prone to making decisions based on emotions and desires. But we are very good at using logic to justify such decisions.
Now go forth and apply this simple test wherever you can.
The day you do this may be the day you begin your liberation from financial captivity and start your long march toward investment literacy and financial freedom.