The other day, I was talking with a friend about how people often have way more than they need for modern life. I pulled out the example of transportation and borrowed an idea from Jacob Lund Fisker. I simply rattled off a list of possible ways to get to the places you might want to go, starting with “basically free” and working up to “really expensive” (and many of these rankings are arguable and depend on where you live, but you’ll get the idea):
1. Walk
2. Bum rides from friends
3. Ride a scooter
4. Ride a skateboard
5. Use rollerblades
6. Ride a bike
7. Use a motorized pay-as-you-go scooter
8. Use public transportation
9. Drive a junker car
10. Use Uber/Lyft
11. Drive a later model, used, low-end car
12. Drive a used mid-level car
13. Lease a car
14. Drive a new low-end car
15. Take an economy plane trip
16. Rent a car
17. Drive a new mid-level car
18. Take a business class plane trip
19. Drive a used luxury car
20. Take a first-class plane trip
21. Drive a new luxury car
22. Take a private jet
You can definitely fill in even more than that, and you can move around some of the items depending on your situation and where you live and what your specific needs are, but you get the idea.
Then, I asked him to name the ten things he does the most with transportation. What are the ten most vital and frequent things he does when he leaves his property? He goes to work. He gets groceries. He takes his kid to school. He goes to the library. He visits a couple of friends. He goes to events around town. I don’t remember the rest, but most of them – and all of the frequent ones – were within five to ten miles of his house.
So, I asked him which of those he could do on foot? Which ones could he do on a bike? Which ones could he take the bus for? This quickly whittled his list down to things he could do once every couple of weeks. Then I said, “Couldn’t you just use Lyft for some of those? And rent a car for the remaining ones?”
This is actually the 80/20 rule (also known as the Pareto principle) at work. The Pareto principle states that for many events, roughly 80% of the effects come from 20% of the causes. In this example, walking and bicycling takes care of 80% (or more) of the things he currently does in his car. Of the remaining 20%, adding public transportation takes care of at least 80% of those remaining tasks. Almost everything my friend might want to do is actually handled by using his feet, a bike, or the bus, and what few things remain are handled by Lyft maybe once or twice a month and renting a car once every few months.
Here’s the thing, though: he drives a luxury car around, and a pretty new one at that.
Now, the point of all of this wasn’t to accuse him of wasting all of his money on this luxury car when there was a much cheaper way to live. Rather, the point was to demonstrate how big the gap was between addressing his actual needs and addressing his wants.
His needs would be addressed with a good pair of shoes, a decent bike, a bus pass, a Lyft once a month, and a car rental every few months for a few days. That would get him virtually everywhere he might want to go. If you add up the cost of those, it is a fraction of the money he’s putting into the car he drives, when you count the cost of the car, the fuel, the maintenance, the registration, and the insurance.
There’s a small amount he’s spending that covers what he needs from transportation, and then a large amount that’s covering what he wants. He wants a luxury car. He wants to not have to think about a bus schedule. He wants to not have to walk or bike roughly half a mile to the grocery store.
Again, this isn’t to criticize my friend at all. Rather, the point of this is to illustrate how wide the gap actually is between the money spent on what he actually needs and what he’s actually spending — the difference is what he’s spending on his wants.
Think about it yourself. Make a list of the ten things you do most often when you leave your property. Do you go to work? Do you go to the post office? The grocery store? How many of those things could you do relatively easily on foot with a backpack? How about on a bike with saddlebags? How about using the bus or the subway while carrying a backpack?
(I find that listing the ten things I most value out of a major item or out of a collection covers the 80/20 rule quite well. It identifies the small portion of that thing that I actually need or very highly value, and the 80% that is just a want.)
If you can do almost all of them without a luxury car, you don’t need a luxury car. If you can do almost all of them without a car, you don’t need a car. You might want a car because of various reasons, but if you can meet your needs without a car, you don’t need a car.
You can do this same exact kind of thinking with virtually everything you own.
What about your house? What are the things you actually need from the place where you live? What are the ten things you do most commonly at your home? What’s the most minimal home in which you could do those things? Could you do them in a one-bedroom apartment? How about an efficiency or studio apartment? Could you do them in a tent or a camper? Again, you’re simply trying to distinguish what it is that you need and what it is that you want.
If you walk through every area of your life like this — your clothes, your various collections, and so on — you begin to see that a lot of the things you own and the subscriptions you have are just wants, not needs. 20% of the things you own make up 80% of what’s important that you get out of them, and thus 80% of your spending on the things in your life gives you only 20% of the value. That first 20% covers your core needs — everything else is your wants.
So what can you do about this?
Recognize that this is a spectrum.
The first thing that people will point out — my friend did — is that when you make a list like the one above, you have a handful that address needs that are really inexpensive, then the higher levels address gradually less important wants until you get to the level you’re sitting at.
Let’s look at that transportation list again:
1. Walk
2. Bum rides from friends
3. Ride a scooter
4. Ride a skateboard
5. Use rollerblades
6. Ride a bike
7. Use a motorized pay-as-you-go scooter
8. Use public transportation
9. Drive a junker car
10. Use Uber/Lyft
11. Drive a later model, used, low-end car
12. Drive a used mid-level car
13. Lease a car
14. Drive a new low-end car
15. Take an economy plane trip
16. Rent a car
17. Drive a new mid-level car
18. Take a business class plane trip
19. Drive a used luxury car
20. Take a first-class plane trip
21. Drive a new luxury car
22. Take a private jet
Each step on that list gives you some more options for transportation and, in some cases, more comfort at a higher price. While there’s clearly a point on there that indicates what you must have to cover your needs, the ones right after that cover a lot of deep wants. In this case, they usually help free up time — if you jump from “public transportation” to “junk car,” you’re saving some time, for example, at a jump in cost.
As you keep going down, each switch usually adds convenience or time or luxury at a gradually higher expense until you reach a point that you chose.
This isn’t black and white. It’s a spectrum. Each step means you spend a little more to have some more wants covered, and as you go up the spectrum, those wants often become a little more frivolous. Wanting to be able to just drive to the store is a more vital want to most people than having a leather seat with a built-in seat warmer.
However, your life is made up of tons of these kinds of spectrums.
Almost everything you do in life is made up of these kinds of spectrums. You are not looking at this spectrum in a bubble.
You have a spectrum that covers where you live. You have a spectrum of job options. You have a spectrum of entertainment options, where there are free options on one end and very expensive options on the other. You have a spectrum for clothing. You have a spectrum for, well, laundry detergent.
On all of those spectra, there’s a low level that covers what you need and a higher level that summarizes what you actually do and use. The difference between those two are wants.
In my experience, most of our expenses in life are spent on wants rather than needs. We spend a lot of money not on what our basic needs are, but on convenience and luxury, and that phenomenon repeats itself over and over.
Take laundry detergent, for example. You have a number of options there.
1. Wash without any kind of soap or detergent.
2. Wash with homemade laundry soap.
3. Wash with store brand laundry soap or detergent.
4. Wash with name brand laundry soap or detergent. (A lot of people are here, which is 4x to 5x more expensive than homemade soap and probably 2x more expensive than store brand.)
5. Hire a laundry service.
There are definitely more levels in there, but you get the idea.
Level 2 probably covers the “need” for most people. Homemade laundry soap consists of equal amounts of soap flakes, borax, and washing soda, and you only need a tablespoon of that mix to wash a load of laundry. It does a good job and costs four or five cents a load.
However, a lot of people jump in at level 4. They buy Tide, which is fine, but it costs four or five times as much as homemade laundry soap (level 2) and probably twice as much as store brand soap or detergent (level 3). 20% of your expense covers the need (the cost of homemade soap) and 80% of your expense covers the want (the cost gap between homemade soap and Tide).
This exact phenomenon repeats itself over and over again. It’s not always a perfect 80/20 split, but you’ll find again and again that the level of expense that covers your “need” is often just a fraction of what you’re actually spending, and the gap there is your “want.”
This is a very useful way to start looking at all of your expenses. What 20% of that expense is taking care of 80% of what I want out of it? You don’t have to immediately switch to that 20%, but it is incredibly valuable to think about it in those terms.
The secret is that over time, we convince ourselves that many “wants” are actually “needs.”
Here’s the real trick that’s going on in this picture. Over time, when you settle into a particular level on a spectrum, it becomes a normal routine. Some level on that spectrum actually is a “need” in your life (or a very core “want”), but you’re at a point on that spectrum that’s way down on the “frivolous want” end of it. However, you inherently know that there’s a need somewhere on that spectrum, so you count the spot you chose on that spectrum as a need.
Think of it with that laundry detergent example above. You need something to wash your clothes so that they don’t smell and look horrendous and have some semblance of a lifespan. Great. However, if you get in a routine of always buying Tide with Febreze, you begin to see Tide with Febreze as fulfilling a “need” because, well, you do need some kind of laundry soap. In truth, Tide with Febreze is about 80% want, as noted above, but because there is some “need” on that spectrum, we define it as a “need.”
I need laundry soap. Tide with Febreze fills that need. So I define Tide with Febreze as a need, even though 80% of that expense is actually fulfilling a want.
This is why thinking about the idea of each thing you buy being on a spectrum is so important for frugality. Just because you are buying something that addresses a need in your life does not mean that a large portion of that expense is not actually a want. It is so easy to just file that expense away as wholly need-based when that’s frequently not the whole story.
A lot of things that we view as needs actually do have a need at their core, but in truth, they’re more about fulfilling a want.
Once you see how much of your spending is really addressing “wants” rather than “needs,” you can start making a lot of meaningful cuts.
Personally, I came to this perspective gradually and didn’t see it in exactly this way at first. Rather, I just saw that there were things I was spending money on that weren’t really necessary to maintain the life I wanted to live.
Take that laundry detergent spectrum above. I used to be a Tide buyer. Now, most of the time, I use homemade detergent, sometimes coupled with store brand detergent if it’s got some sort of special promotion going on. Why? I realized that laundry detergent was something in my life that really only had to fulfill a need. The extra “want” — the nice aromas, lower static cling, mild fabric softening and reliable name brand that Tide offers — wasn’t something that really provided much value in my life. I want clean clothes, period. Anything else provides almost no value to me, so why spend money on it?
Basically, look at that gap between “need” and “want” on each spending spectrum that you notice and ask yourself what those “wants” are really adding to your life. On that laundry detergent spectrum, what are you actually getting out of each level above “need?” Are those extra levels really worth it for you? What value are they adding to your life?
I don’t break things down to a long listed spectrum for each thing in my life, and you shouldn’t either. Rather, once the idea is natural for you, you can apply this kind of thinking quickly to almost every expense in life. It boils down to instinctively figuring out what you actually need from that particular item and how valuable the various levels of “want” on top of that need actually are. These judgments come pretty quickly.
Those cuts are about cutting away at the lesser wants so that you have room for things that you deeply want, that come much closer to needs.
This is really where the magic is in this story. When you see a situation where there isn’t much justification to spend above your “need” level or to spend at the high level of “want” that you’re currently spending and you make a cutback, that doesn’t mean a reduction in your quality of life. Rather, it means an improvement in your quality of life.
Why? That money you’re saving from making a low impact move on one spectrum means that you can make a much higher impact move on another spectrum. Because you cut back on a really minor want in one area means you have the money to cover a need or a really important want in another area.
Because I cut back on laundry detergent and 50 other things that don’t really matter to me, cutting all of them back to basically just covering the level of “need” from that item, I had the money to build an emergency fund and start chopping down debt. When debts disappeared, I had even more money each month because monthly debt bills were vanishing. I had the money to spend on things that I deeply wanted because I wasn’t spending money on things that I didn’t really want.
So, what can we do?
Get into the routine of “spectrum thinking” about all of the things that you spend money on. When you grab laundry detergent at the store, think about that choice on a spectrum for a moment. You don’t have to bury your entire shopping trip in that kind of thinking, but give that kind of thought to a few items each time you go shopping. What do I need out of this item? What here can fulfill just that need? How much of this expense is a want? Is that desire really an important desire in my life?
When you realize that you’re spending extra on a want but that want seems pretty unimportant compared to other things in your life, you’ve probably found a great place to cut back a little in your life. Is the difference between the name brand item and the store brand item really important to your life? If not, buy the store brand item. Is the difference between a new car and a used, late model covering a very important want in your life? If not, buy the late model. Is having a car at all fulfilling a major want in your life if there’s a bus stop right near your door? If not, sell off that car.
To help with those choices, consider areas of your life where you’re struggling to cover needs and important wants. Do you have an emergency fund? Are you putting money aside for major bills that you know are coming up? Are you saving a little for retirement? Is not having those things introducing worry and mild stress into your life?
Dialing things back on the various expenses in your life where the “want” portion of the expense is fairly frivolous can help you easily cover this other area of life where you’re barely meeting or not even meeting an actual “need” or the “want” is really important. If you can’t hold down an emergency fund because the mortgage is too high, maybe it’s time to look at a smaller home, or if your rent is crushing you, maybe you can look for somewhere else to live for now. If you can’t make any progress on your mountain of debt because of the car payments, maybe it’s time to look at the gap between “wants” and “needs” in your transportation. If your entire budget is just too tight, look at the “wants” and “needs” for many of your smaller purchases.
Over time, you can find a balance where you’re taking care of the needs and most important wants in all areas of your life, while even having a bit of extra room for some of your favorite frivolous wants, too.
Good luck.
The post Distinguishing Between Needs and Wants Using the 80/20 Rule appeared first on The Simple Dollar.
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