In a world with rapid innovation, constant advertising regarding the latest device that will simplify your day, and endless upgrades, determining what you really need to survive is difficult. But if you lost your job tomorrow or a costly life-altering expense suddenly appeared, would you know the minimum amount of money you would need to ensure your survival in your current state?
Most folks do not know how much money they would need to survive, so do not feel bad if you have no idea. Few people even know the cost of their current lifestyle and definitely have not thought deeply about their minimum life operating cost.
Differentiation Is Empowering
The purpose of determining what parts of your spending are wants versus needs is not to eliminate wants or shame you for spending on them. The purpose is actually the opposite. Most individuals and families have no idea what their basic cost of survival is. Determining how much money you need to truly just survive is empowering.
If you are not actively going into debt, knowing how low your survival number is provides comfort in a newfound abundance.
If you are actively going into debt, one of two things must be true. First, you are spending on too many wants that are misidentified as needs, and this article can help you parse them out more intricately. Second, your needs are truly higher than your current income. While this may seem discouraging at first, you still have empowering knowledge: You know exactly what salary to fight for in a negotiation so you can stop accumulating new debt.
If a person makes $50,000 and spends it all on monthly bills but does not go into debt, that may feel like a dangerous paycheck-to-paycheck lifestyle. However, if that same person also knows they choose a few “wants” each month that could be given up in an emergency situation, that is a natural financial safety net if an event changes that income stream.
Odds are, the amount you need to survive is lower than you expect. Knowing that will give you confidence when negotiating with your employer, landlord, or anyone affecting your income or daily environment.
General Needs
Write down a basic list of what you consider necessities. Actually do it, then come back here and continue reading.
Your list is probably somewhere along these lines:
Shelter/home
Food
Medical/health care
Transportation (whether car/gas/insurance, bike, bus or public transit pass, etc.)
Internet and cell phone + plan
Basic amount for clothing and everyday essentials
That list is useless.
Why? Take an extreme example to make it obvious. Joan is a partner at a top DC law firm, and her budget of necessity categories only looks something like this:
According to the typical “needs” categories, it costs Joan $50,495/month just to survive and meet her basic needs, before budgeting for any “wants” she may have.
Get Nuanced
Whether something is a want or a need is more nuanced than whether it falls into a certain expense category. Joan could live off of less than $50K/month, but many of her expenses are partially wants and partially needs. Joan does need a home. She may not need that river view penthouse.
For a closer-to-home example, take my home: Patrick and I spend about $3,500/month on our mortgage, HOA, and utilities. This gives us a home, which we need. These expenses also give us a parking spot for our car (which is 100% a luxury item based on where we live!), pool access, gym access, grill access, and a desirable location near many other life-improving amenities.
In a financially tight emergency, we do not need our wonderful home with its amenities, or our car. We need a home that is at least a one-bedroom/one-bathroom since Patrick and I both work from home regularly. This home needs to be accessible by public transportation (the “Metro” in our area) to my place of work, giving a certain radius for where we could live. It would not need parking. Since I also am allergic to the entire outside world, anywhere I live needs to have a certain level of cleanliness as well, so I can sleep.
Given these restrictions, a quick apartment search shows we could probably find a place for about $1,200-$1,500/month if we absolutely had to relocate. We could theoretically rent out our home to cover our mortgage (at current rates, we could likely cover it, but would not get much if any money above).
In summary, here’s a breakdown of our housing cost, according to the portion that is a “want” as opposed to a “need”:
The wants and needs differentiation does not need to be precise. You can see that I just took the average of the range of costs for apartments that met our minimum criteria.
While precision is not paramount, honesty in your assessment is. If you round up slightly when parsing out what portion of your expenses are needs, you are simply cheating yourself of the peace of mind you get when knowing you can live cheaply.
Get Complex
If I did not ever have to visit a physical work location, this could get even more creative. We could live in a place less expensive than the DMV (DC-Maryland-Virginia) area. However, moves like that are not always only cost-savers. We could reduce our housing price substantially by moving to a small town in rural Pennsylvania. However, we would undoubtedly need a car there. We would almost certainly drive more, increasing both our current gas and insurance costs. Especially when making city-to-suburb/rural area comparisons, it may be prudent to couple housing and transportation as one category.
You may find you have a ton of restrictions in place or you have fewer than expected. Neither scenario is unexpected. If you run a business moving heavy equipment, you need a truck capable of hauling a certain weight, even if the vehicle, gas, and insurance costs are greater than a sedan. If you take care of a sick relative with limited mobility in San Francisco, you may need to endure the high cost of living in or near San Francisco.
On a smaller scale, you do need a cell phone to exist in 2023. However, you probably do not need the newest iPhone, and you probably do not need unlimited data. I make enough money to pay for that $3,500 condo and still have an iPhone version with a home screen button because the latest phone is simply not an important want for me!
Every person or family’s cost of needs is unique to their situation. Just be honest with yourself when assessing your own cost of needs. Most of us have more house, takeout, car, phone, clothes, or expensive shampoo than we need. If you are not accumulating debt, there is no need to stop enjoying those luxuries. Just acknowledge that they are wants.
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