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The only way to save money has always been the same — and you can't do it without making a key distinction

dinnerWhile a bad economy or an especially low-paying job can make saving money infinitely harder, the formula for saving has always been the same. To save money, you need to spend less than you earn.

Obviously, this task becomes a lot easier when you earn more than average – or if you live in a low-cost area. If you have a six-figure income and live in Arkansas, for example, you should absolutely be socking some money away. On the flip side, someone living on the same salary in an expensive city like New York City, Boston, or San Francisco might not have much if anything left over after covering basic expenses like housing, food, and childcare.

But, no matter your income or where you live, you have to find a way to spend less than you earn if you hope to save money to retire, have some fun, and avoid debt. You can get a side hustle or a part-time job if you want, but if you don't spend less than you bring home, you're always going to struggle.

That's why it's important to determine the difference between your "wants" and "needs" — and to understand why that differentiation matters. Without a grasp on why these terms matter, it's significantly harder to get on the right side of your financial ledger.

Wants vs. needs

What is a "want?" And what is a "need?" While everyone's wants and needs can vary, there's a big difference between these two terms when it comes to how you spend your money.

Generally speaking, a "need" is something you absolutely cannot live without. You need a roof over your head, for example. You need food and health insurance and transportation to get to work.

You need electricity in your house, you need food to eat, and you need a telephone. In this day and age, you probably even need internet access for your job or so your kids can do homework.

A "want," on the other hand, is something you'd like, but could probably live without if push comes to shove. You want to go out to dinner tonight so you don't have to cook. You want a shiny new iPhone X, even if you’re existing phone works just fine.

You want concert tickets and an annual beach vacation, but you wouldn't die if you couldn't have these things.

A want is something you very well may be able to afford, but don't actually need to get by.

When needs are actually wants

But, what happens when something you consider a need is actually a want? This happens all the time, and it really throws people off. Worse, it tricks people into justifying purchases they wouldn't make it they really thought it through.

For example, you need to eat, it's true. But, do you need to dine out at your favorite pub tonight? If you have food to eat at home, the answer is no. But if you're in the mood to justify the purchase, you could tell yourself you need to eat and do it anyway.

You also need a cellphone because it's 2017 and hardly anyone has just a landline anymore. But, you don't need to upgrade to the new $1,000 iPhone, and you may not even need a smartphone. Heck, you may not even need a data plan — but since you know you need a phone, you can convince yourself you need the best possible phone with the priciest talk, data, and text package money can buy.

New cars are another area where it's easy to confuse what you want with what you need. You may need a car to get to work. You probably don't need a brand-new car financed for 72 months with a $500 monthly payment. But, since you know you need to get to work, you can talk yourself into buying what you want on the premise that your shiny new ride is a need.

Well, guess what. It's not.

In all these instances, you absolutely need the item in question — food, phone, transportation — but you're choosing to spend more than you have to. In these cases, it's important to be honest with yourself about what you need, what you want, and the difference between the two.

Three steps to help you separate wants from needs

There's nothing wrong with spending money on wants. I would even argue that paying for wants is an important part of life. If life were only about working and paying bills, then it wouldn't be much fun.

The problem arises when people conflate their wants with their needs to the point where their spending stands in the way of their financial goals. When we spend money on wants without determining if they're really a priority, we often shortchange ourselves in the areas of our lives that really matter – things like saving money for college, emergencies, retirement savings, and vacations.

If you're struggling to separate wants from needs, here are three steps to help.

Step 1: Decide which wants truly add value to your life.

If you're spending more than you should and having trouble separating wants from needs, it's smart to take a step back and look at what you're actually buying. Do your wants add real value to your life, or are they made out of convenience? Are you making discretionary purchases because they're important to you, or simply out of habit?

While spending on wants is an important part of life, some wants are more important to us than others – and if you stop to examine you’re spending, you may find that many of the splurges you're making aren't really worth it. By deciding which wants add real value to your life, you can determine which ones to keep and which wants you can live without.

Step 2: Trade away some of your wants for a better deal.

Depending on the "want" in question, you may be able to come up with an alternative action that lets you save your money instead. This is a good strategy to try when you're spending on something out of habit or out of convenience.

For example:

  • If you dine out a few times per week more out of convenience than pleasure, you may find you can cut your spending and still eat conveniently with some simple planning. If you can get in the habit of meal planning or using your crock pot to make easy dinners a few nights per week, for example, you may be able to avoid hasty, unfulfilling dinners out and pocket that money instead.
  • If you have an expensive cable package out of habit but never watch all the channels, you may be able to choose a cheaper package and save money without really noticing. Heck, you may even be able to cancel your cable subscription together.
  • If you're signed up for multiple subscriptions for magazines or any of those subscription boxes like FabFitFun but you rarely have time to enjoy what you receive, you might be able to cancel without any real impact to your happiness or fulfillment.

It's important to have wants in your life, but you should only splurge when you're truly benefiting. If a want isn't really making you happy, you'll get more out of your hard-earned dollars once you cut the fat and reallocate those dollars to make them count.

Step 3: Figure out how to afford what you really want.

Let's say you have a handful of wants that are really important to you. You love having a new car because you drive an hour to work each way, or you're a huge tech geek who can't wait to get your hands on every new phone or game console that comes out. Maybe you're a foodie who loves dining out so much you're willing to sacrifice elsewhere to be able to try all your favorite restaurants.

Working those wants into your budget is obviously important, but you need to make sure you can afford it. If you're not saving money already – or if you're spending all you earn and going into debt – then you probably need to analyze your spending in its entirety to find other places to cut.

The best way to determine whether you can afford everything you want – in addition to everything you need, of course – is to use a monthly budget and track your spending. While tracking your purchases can prevent you from spending more than you want, a monthly budget can help you prioritize your monthly obligations and your wants without sacrificing your savings goals.

My favorite type of budget is the zero-sum budget because all it takes is a pen and paper to get started. Zero-sum budgeting also makes prioritizing easy since it forces you to "spend" all your money on paper and "give each dollar a job."

In addition, zero-sum budgeting forces you to pay your savings and investments as if they were regular bills, then learn to live off the rest. In that sense, it may force you to reevaluate your wants and needs since you'll have less discretionary money over all.

The bottom line

If you're struggling with money and can't earn more of it right now, your best step is maximizing the money you have. Very often, the best way to do this is to take a close look at your monthly spending to see how much you're splurging. From there, you can decide if those “want" are truly worth it, or if you'd be better off taking a different approach.

At the end of the day, the best way to make sure you can afford what you want is to think ahead, be intentional with your spending, and most importantly, and be honest with yourself. We all want things in life, but those who get the most of what they want are the ones who plan.

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