6. Step 1: Goals
To illustrate the steps for making these distinctions and using that information to set financial goals, let’s follow Henry’s example. Henry has a fairly decent but low-skill job, grossing $15 an hour. He thinks he could get a better job if he completed a two-year degree in a technical field. He’s dating a woman he likes a lot. Since the feeling is mutual, he thinks they will decide to marry—but not until she finishes school in two years. He has a long wish list of wants and needs but a short wallet. He decides to make a written chart to help him decide where to put his limited resources. First, he identifies whether each item on the list is something he absolutely needs or is really a want. Then he makes a judgment about how badly he really needs or wants each—that is, he puts them in priority order.
First Step |
Second Step |
Third Step |
My Needs and Wants |
Need or Want? |
Priority Importance?
1=gotta have
2-really want
3=would be nice |
Buy a leather coat |
W |
3 |
Buy a sound system |
W |
3 |
Go to community college |
N |
1 |
Buy a better car |
W |
2 |
Rent a better apartment |
W |
3 |
Save money for a down payment on a house |
N |
3 |
Pay off credit cards |
N |
1 |
Deciding whether an item is a need or a want and what priority it should have is not always obvious. For example, a newer car might be something Henry wants, but could feel like a need if he thinks it will help him travel farther and more safely to a better job. Building up money for a down payment on a house might be a want with a low priority for Henry today. But, when he looks forward to marriage in two years, maybe that should become a need with a higher priority than satisfying something else he’s “gotta have.” While paying off credit cards would just “be nice,” in reality that should be a first-priority need because it will help Henry free up money for other wants and needs down the road.