In many of my "Path to Prosperity" programs, I do live Need Analysis of expenses (of course with a lot of fun) for one volunteer. The objective is to make the participants understand that starting to save is easier than they imagine. As you may be aware, ‘need analysis’ involves classifying the expenses into three categories viz., needs, wants and luxuries.
The recommendation is to gladly spend for the needs and postpone the wants and luxuries (only wherever needed). I have also clarified in my blog Frugality vs. Liberality in Personal Finance that Financial Planning is not about blindly cutting down on expenses and living frugally.
In my opinion, need analysis of expenses is one of the smartest actions for the following reasons:
- When you follow concept of ‘paying yourself first’ i.e., saving first before spending, the ‘need analysis’ of expenses enables you to meet your expenses with grace. More importantly, if the concept of need analysis of expenses is not taught, many people will give up saving and miss out on the wonderful ‘power of compounding’.
- In fact, after doing need analysis, you can go for high quality for needs of life, since you are in a position to postpone your wants and luxuries. For example, you may buy better quality of vegetables and fruits. This is certainly smart thinking and not small thinking.
- In the absence of need analysis, even wants will look like needs, thanks to our impulses and the ads in the media. I remember a relative of mind told me that he and his colleagues started having bottled aerated drinks during summer afternoons. Ironically, the best way of quenching thirst even in summer is to have water or tender coconut or butter milk. But thanks to the powerful ads, the cola manufacturers have convinced that aerated drinks can quench thirst. In fact, one of the gentlemen even remarked, "I don’t know how we managed all these days without the cola in the afternoons?" This is how even educated people are pushed to mistaking ‘wants’ for ‘needs’.
- I have seen a lot of wasteful expenses that do not benefit anyone, in the case of people, who don’t analyse their expenses. Does anyone benefit by the fan not being switched off, when no one is there? Do you need to see a movie on the first day of release by paying a premium?
- As I mentioned in the blog Frugality vs. Liberality in Personal Finance, the discipline of paying for luxuries only out of passive income is truly a big thinking. After creating passive income, you will not feel guilty in indulging in luxuries because you deserve those. In fact, after some time, your active income plus passive income will be so large that there will not be any need for ‘need analysis’ of expenses.
We can keep adding to the list. Ultimately it is the prerogative of every individual to decide on the ‘need analysis’. As long as the individual takes a conscious decision, he takes full responsibility and let us leave it there. What do you say?
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