In my first post for the Family Guide to Living on Less, I talked about the importance of assessing your financial situation and establishing a budget. Today’s post will focus on distinguishing between luxuries and necessities.
photo credit: istockphoto
A luxury is a “want”–a desirable thing to have to increase comfort and make life more interesting and fun. You’ll find plenty of these on your lists. A necessity is a “need”–fundamental to existence and survival. You’ll find some of these in the lists you have Go through your lists and mark each item with and “L” or an “N” depicting luxury or necessity.compiled. Your home, food, insurance, and medicines are all necessities.
As you go through your lists and mark items and categories wiht Ls and Ns, you may find some real surprises. Although we always assume we know where our money is being spent, you may very well be surprised. Also, as you do this exercise, you are going to come across items that you normally would want to buy, but you know could be purchased more economically or there may be a cheaper substitute. When you come across these items, give them a special notation, like an asterisk (*).
photo credit: manmadepants
Don’t confuse “necessary bill to pay” with “necessity”. A loan on a boat is a necessary bill you have to deal with, but the boat itself is a luxury item. Mark it with an L. If your child is involved in an expensive sport and you’re in the middle of the season, these are expenditures that must be made unless you withdraw your child from the sport. It seems like a necessary bill to pay, but it remains a luxury activity.
The world isn’t black and white. You’re bound to find items on the lists that are difficult to mark as either a necessity or luxury. No problem, mark it with an NL and move on. You can always go back to it later.
The careful analysis of each expenditure as a necessity, luxury, an NL, or an asterisk will be most beneficial for the nonbudget type person. This exercise should clearly show you where your discretionary money has been spent. If you use this N vs. L exercise as the basis for a family discussion, it will probably launch some hot debates. Each person in the family will have his or her own “sacred cows” that couldn’t possibly be cut out! However, that is precisely the reason behind the exercise–to get you to analyze seriously your spending habits and begin to prioritize your luxuries.
photo credit: Doug Johnson
An optional step to take after the lists are complete is to sum up all the luxury items. Calculating what percentage of your income is spent on luxuries can also be enlightening.
Come back to read the next post in this series, “Creating a Budget”, coming soon!
6 Comments
July 21, 2008 at 8:55 am
Great post Anna, you’re right – distinguishing between our necessities and luxuries is the first place to look if we want to get out of debt, and start on the road to financial freedom.
One thing I found with myself and people I knew well, is that it is often easy to think a luxury is a necessity.
If you’re serious about getting out of debt, you must force yourself to be brutally honest when doing this exercise!
July 21, 2008 at 7:36 pm
It’s hard to make the lifestyle change that getting out of debt requires, but it’s a must.
August 6, 2008 at 8:46 pm
[...] Luxuries and Necessities [...]
August 26, 2008 at 8:11 pm
[...] Luxuries and Necessities [...]
August 29, 2008 at 10:16 pm
[...] Stay tuned for the next post in my series, “Luxuries and Necessities” [...]
November 23, 2008 at 1:45 pm
It is also important to keep in mind how the “little” luxuries add up quickly over time. I used to buy a cup or two of coffee every day at work. This would work out to a couple of dollars a day, and several hundred dollars per year. Now, I have a little coffee maker in my office and will only buy a coffee if I am meeting with friends and colleagues. If you add up all those other little luxuries, they may end up being in the thousands of dollars per year, yet you justify yourself each time by saying it is “only” a cup of coffee or it is “only” a burger…