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.