As I do most years, I spent some time looking at Black Friday flyers for a number of stores in my area, just to see what kinds of things will be on sale on the day after Thanksgiving. I used to look through those ads to seek out bargains for myself or for inexpensive gifts for friends and family, but these days I usually just hang out around the house on Black Friday.
As I leafed through the sales on flat screen televisions and smart phones and video game systems, I couldn’t help but realize that virtually everything on sale was unnecessary. I don’t need a big flat screen television. I don’t need a smart phone. I don’t need a shiny new laptop.
The interesting part is that we often elevate these things to being “needs.”
Take cell phones, for instance. I can actually understand the need for having a cell phone for emergency purposes, but having one for that just means having a really cheap flip phone in your glove compartment to call 911 in a pinch. Such devices cost nothing – you don’t even need a plan to do that. Yet 91% of Americans own cell phones (and that number has probably gone up since that article was written).
You can make the same exact argument with television. The only thing that might elevate television to a need – emergency bulletins – can be handled with a weather radio. Yet around 97% of American households have at least one television.
Now, the argument here isn’t for you to dump your television or your cell phone. That’s not the point. The point is that almost everyone elevates expenses that are unnecessary – and cell phones and televisions really are unnecessary – to being necessary and treat them as such within their budget.
There are several reasons why this is a big deal.
First, 76% of Americans currently live paycheck to paycheck. This means that if their income suddenly faltered, they would be in serious financial straits within a month. At the same time, a third of Americans are carrying a month-to-month balance on their credit cards.
That means that, if you assume these statistics are truly independent, about a quarter of American households have a cell phone and a television, but are living paycheck to paycheck and have a month-to-month balance on their credit cards.
There are no two ways about it – that’s a recipe for disaster. The people in that situation and similar situations have elevated wants – cell phones and televisions – to be equivalent to needs – sustainable food, clothing, and shelter.
Second, elevating wants to the level of needs creates a sense that you never get to fulfill wants, even though you’re doing it constantly. Your television is fulfilling a want. So is your cable bill and/or your Netflix subscription. Your cell phone is fulfilling a want.
Yet, when you view those things as a need, you can feel as though you never splurge on yourself. With a cell phone bill, a cable bill, an internet bill, a regular smartphone replacement, the cost of computers and multiple televisions, and so on, you’re easily spending hundreds a month on things that are actually wants, but because you choose to view them as needs, you can easily feel as though you’re never splurging on yourself at all.
Third, when you block off hundreds of dollars per month for various wants, it becomes very hard to reach financial goals, especially when your income isn’t too high. Let’s say you have a $100 cable or satellite bill, a $100 cell phone bill, a $50 internet bill, and you replace a $500 television every five years (which is another $8 a month) and replace a $300 cell phone every two years (which is another $12 a month). That’s $270 a month spent on wants that people often redefine as needs – easily a car payment or a hefty 401(k) contribution or a huge extra payment each month to get rid of a credit card – and it doesn’t include many other things that people might include here, like Netflix or a gym membership.
What does all of this add up to? Unnecessary necessities keep us from our financial goals by keeping us blind to how many splurges we actually have in our life.
Here’s the good part, though. The solution to this problem isn’t to get rid of your television or your cell phone or anything else. The solution is… well, let’s take a look.
First, subscribe yourself to a smart proportional budgeting system, like the 50/30/20 system proposed by Elizabeth Warren in her great book All Your Worth. The 50/30/20 system is really straightforward – it basically means that in a given month, you allocate 50% of your after-tax income to needs (like utilities and rent), 30% to wants (like cable and phone and internet and eating out and so on) and 20% to saving for the future (like eliminating debt and retirement savings).
What’s the value in doing this? Well, since many people often treat “wants” as “needs,” they perceive their budget as looking more like a 80/20/0 split, because once their 80% of income is spent on “needs” – some of which actually are needs, like utilities, and some are merely wants elevated to the level of needs, like cable television – they still want something to splurge on and that leaves virtually nothing for actually saving for the future. This is a big part of why 76% of Americans currently live paycheck to paycheck.
Sit down with your actual spending for a typical month. Look at what your bills are and what your expenses are. Total up your regular bills that are unnecessary necessities, like cable and internet and your cell phone, along with your other purchases that are unnecessary “necessities” and wants, like Starbucks and fast food and new clothes, and see if all of that fits into 30% of your take home pay.
If you’re like many people, it won’t even be close. Your wants will take up half or more of your monthly spending.
The thing is, as you go through that list, you’re going to see that a lot of your spending on “wants” is pretty silly. There will be a significant chunk of it that you don’t even remember. There will be other expenses that you didn’t get much value out of at all even if you did remember it.
Those are the things you need to cut to get to 30%, not things like your cell phone or your cable bill. The best cuts are the ones that are pretty unimportant to you so that when you cut back on those things, you don’t really notice it.
At our house, we do something very akin to this. We essentially sat down and figured out our full family budget using a model that’s more along the lines of 30/25/45 (meaning 30% needs, 25% wants, and 45% saving for the future). Within that 25%, Sarah and I basically split the amount evenly. I don’t watch television much at all unless Sarah wants me to watch something, so she counts the cable bill just for herself. We split the cell phone bill and the Netflix bill. Out of the pool that’s left, we cordon off a portion for eating out a couple times a month as a family (which we split) and a portion for vacations, then we take the rest and give each of us an “allowance” of sorts to spend on whatever we want.
That “allowance” is a cap on my monthly spending on my own “wants.” I use that money for my hobbies and for going to conventions and for anything incidental that I might want.
Another really useful tactic that goes along with this is to automate your savings. Simply sign up for an automatic transfer each week from your checking account to your savings account and also sign up for a Roth IRA that’s also funded automatically.
What this does is guarantee that you’re saving for the future while also putting a direct restriction on how much money you actually have free to spend on your wants. It’s kind of a double win in that it achieves both goals – spending less on wants and saving more for the future – at the same time without requiring you to put any effort into saving money once the automation is in place.
These are the tools we use to ensure that unnecessary necessities don’t cause our budget to come crashing down. These steps keep our “wants” spending in check without creating a feeling of deprivation, partly because we delete the most wasteful of our wants, but also partly because we see the “unnecessary necessities” in our life and recognize them as fulfilled wants, which shows us how much we really do have in our lives.
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