How many times have you been told that you need to distinguish between a “need” and a “want”? Innumerable, is my guess. Everyone who has tried to draw a monthly budget would have attempted this classification. Ironically, it is the predominant reason why people find it difficult to live within a budget.

On the face of it, the distinction is clear and very practical. Needs are your survival. Wants are your desires. Cut down the latter if you want to save. But in reality, this timeless financial proverb doesn’t play out with such simplicity.

I am going to attempt to explain why. Money must never be viewed in isolation; it must always be acknowledged along with the emotional need it helps us meet.

Let me elucidate with an example from my life. At a time when I was going through a tough emotional period, I would do a lot of my writing and work at a Starbucks outlet.

Was it more expensive? Of course; coffees are not cheap. To add to the bill, I would sometimes pick up a snack to munch on. Then there was the expense of travel. It was also unhealthy because some of those coffees are loaded with calories.

This was certainly not a “need”. It would have been much cheaper and logical to just sit at home and make my coffee.

But me going to that coffee shop had nothing to do with coffee. I loved the ambience, the music playing in the background and the incessant chatter. I enjoyed talking to strangers and interacting with the staff. Occasionally, I would catch up with a friend over coffee. I just cherished the independence and the fact that I could afford to work in an environment other than office and home. I enjoyed the break in monotony that it offered.

Obviously, the need-want classification could not smugly fit this into its black-and-white classification. My need was not one of caffeine, it was the need for social engagement that I needed during that phase in life.

When it comes to your finances, there is a constant battle between emotion and logic. Because our financial decisions are never made only with our heads, but made in the larger context of our emotions, desires, sense of identity, and our need to be accepted. Very little of it really has to do with numbers.

I had a friend who spent a small fortune on branded bags though she was very careful about her expenses in other areas. She once explained to me that the bags validated and boosted her self-esteem when she went for a business meeting or a dinner.

So, if you cut something out of your expenses without tracing it back to the need that you are meeting with it, your expenses will diminish, but the need will not go away. And if that need doesn’t get met, it will make you miserable.

You Cannot Put A Price On Everything

I see so much of writing where individuals are advised to calculate and save the money paid for coffee, beer, cigarettes and lunches. And to guilt trip the reader, the terms flung are “dead money, money wasted on stupid things, money that should have been invested instead.” I read an article that advised people to stop buying the newspaper when news is easily available online. The explanation indicated that the, say, Rs 150 spent every month amounts to Rs 1,800 per annum. This cost will increase with inflation. Now, calculate investing that amount every month in a mutual fund systematic investment plan (SIP).

Sounds very practical. And I will go so far as to say that there is some truth associated with the advice. But, has the writer taken into account the joy a reader gets sitting down with his paper in his favourite chair, sipping chai, reading, or doing the crossword? Would you really put a price on that?

I view eating out in a similar way. People don’t go out to eat dinner because there is no food in the house. They do it because they want to connect with friends, they want to bond over a meal, they want the adventure of experimenting with a new cuisine, they want to dress up, they want a break from the routine, they want an outing for the family, and they want to create memories.  

There is always a story behind the “wants”. That story will be tied to your sense of self-worth, self-confidence and self-esteem. It will be meeting a need, even if not overtly. That is why you must view all your spending patterns in conjunction with your emotional needs.

Human beings are not robots. We are not machines. You cannot shove an Excel sheet in someone’s face and tell them to follow it if they want to get wealthy. Financial planning goes beyond spreadsheets, charts, equations and numbers. It is much more than a listing of Do’s and Don’ts.

Take the issue of retirement. Very often, the decision on when to retire is construed to be a mathematical one. Have you reached the targeted corpus amount? Will the cash flows (dividend income, interest income, rental income, pension, annuity) provide you with the life you want to lead in retirement? Do you have a clear-eyed assessment of the withdrawal rates on your corpus?

Financial resources are obviously a key input when deciding whether and when to retire. But, they cannot be the sole consideration. Running parallel are other issues to consider. How do you plan to spend your time? From where will you get your sense of purpose? Will your social connections compensate for your lack of professional engagements, if you need constant interactions? Money is a very crucial consideration, but not the only one.

Money As Emotional Currency

List down your expenses (rather than needs and wants), and identify the emotion they are fulfilling. Once you do that, you can come up with a strategy for meeting that need.

Let’s say you want to go out for a meal every Friday as it indicates the start to the weekend. The only goof-up is that apart from that you also go out over the weekend and end up spending a tidy amount altogether. Maybe you can “start the weekend” watching a movie on Netflix and experimenting with a new recipe. Do you get the gist?

A common analogy is the need for transportation. This can be met in different ways (car, bus, train, bike, walk, cycle, car pooling, Uber/Ola) and each has a price tag and a convenience tag. If you are judging what you can and cannot have by what you need to survive, you are setting yourself up to be emotionally deprived. And if your emotional needs are not met, they get louder and eventually your budget will blow up in your face.

Instead, ask how you can meet your emotional and physical needs with the resources that you have? This simple shift in perspective makes all the difference. It will show you what matters to you and what you really value. It will tell you where you can cut corners, and force you to apply your mind and get creative.

There is no right or wrong. There is no good or bad. Just be brutally honest with yourself.

The author is Investment Specialist at Morningstar India