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Financial Awareness: Money and Transactions
Needs, Wants and Aspirations
Needs, Wants and Aspirations
Needs are essential, ‘must-have’ items that everyone must have to survive, such as water, food and shelter. Needs are quite limited.
Wants are optional, ‘nice-to-have’ items that are desirable but not essential, for example jewellery, a big house or going to the cinema. They are items and experiences that people wish they could have, over and above their needs; they cannot fulfil their wants until their needs have been met. There is no limit to what someone can want.
It is important to distinguish between needs and wants. Essential items such as water, basic food and clothing are needs for everyone. More expensive food and fashion clothing are not necessary and so they are wants. If a person’s budget changed, they would make different decisions about what to buy under the heading of ‘food’. So, needs and wants are related to the price of products and to people’s ability to buy them.
Aspirations are hopes for the future. They are the items or experiences that people wish to have in the medium-term or long-term future – for example, going on an exotic holiday, or getting a good job. Aspirations can be realistic (such as buying a nice car), or unrealistic (such as buying a luxury yacht). When people plan long-term finance, aspirations are a key consideration.
Needs do not change much over the life cycle, but a person’s values – the things they consider important to them – might change as they grow older and have different experiences. As their values change, their wants and aspirations might change, too. In turn, these changes affect how people manage their money.
As people move from childhood into adulthood and then grow older, their needs and wants change according to:
Their aspirations probably become more realistic as they learn more about life.
There are three main reasons why people spend money
To pay for essential items they need
To pay for optional items they want now
To save for items they aspire to buy in the future
The distinction between needs, wants and aspirations is an important one for financial planning. Let’s look at some examples:
When planning finances, people should pay for needs first. If they have spare income after paying for these needs, they will consider paying for wants and saving towards aspirations.
In order to satisfy their needs, wants and aspirations, people have to be able to finance them – in other words, they must have enough money to afford them. Below is a list of various financial products:
Medium-term and Longer-term Savings
People need financial products that allow them to save over a longer period – that is, more than three years. They do this so they can put money away to cover future needs and wants and to allow them to fulfil their aspirations. For example, a young person aiming to open a business in five years’ time needs to save money for the capital (that is, funds to pay for premises, equipment and any other costs needed to set up the business). Banks and certain other providers offer longer-term savings accounts where customers can build up the lump sum they need.
Investments
An investment is a longer-term form of saving; people invest to save for a longer-term want or aspiration. It is different from a long-term savings product because it is riskier, but it can bring in a higher return. A parent might save money in an investment scheme while their children are young so they can help them with their university education later.
Pensions
Many people save money in a pension scheme throughout their working lives to finance their retirement.
Longer-term Borrowing
When people borrow money to finance a large purchase, they need to pay it back over a long period, otherwise they cannot afford it. The best example of such a loan is a mortgage, which is a loan secured on the value of the property being purchased. Hire purchase is a type of secured consumer credit to finance items such as cars and furniture, which also involves the borrower repaying over several years.
Insurance
Insurance companies and banks provide insurance policies that cover long-term risks. For example, people who buy their own home can insure the property and its contents against loss from a range of risks. Life assurance allows people to protect their loved ones in case they die, and some products also enable people to save money for a later stage of their lives.
A financial product is an instrument in which a person can either: make a financial investment (for example, a share); borrow money (for example, credit cards, loans or bonds); or save money (for example, term deposits) – they are not like a car, people do not get pleasure simply from having them. They buy financial products because such products enable them to satisfy their needs, wants and aspirations. A decision to satisfy a need or want and therefore to buy a financial product is based on both internal and external factors.
People need to be sure they understand the financial products they are buying and that the products match their needs.
Achieving Financial Awareness
Life Cycles
A personal life cycle attempts to summarise the key phases which all individuals go through during their lifetime matched with their changing financial needs
Internal and External Factors
Internal factors are those that come from within people themselves
Money Value
Prior to making the decision of borrowing money, it is important to first decide not to buy the things that we want