Most of us are aware that managing your personal finance is the easiest way of wealth creation.

Many of us even follow it closely.

The two most important principles of being financially successful:

Spend lesser than you earn

The first principle is easy to understand.

Every individual either knowingly or unknowingly is following this principle. Moreover, it’s even easy to adhere to this principle because it simply means that your expenditure shouldn’t exceed your income.

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Aim to save more or equivalent to what you spend

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The second concept is more difficult to achieve than the first, but it’s a wonderful goal to work towards.

It means to save more than your expenditure, which is a big achievement in today’s world.

In a more simplified explantaion, if you are struggling to even fulfill your basic needs (that is shelter, food and clothing), if you have trouble in spending less then what you earn, then it’s impossible to grow your money.

The millennial is saving money in crazy ways to retire early!

You probably can’t expect to save for a down payment of a house, if you are barely able to cover your monthly food cost.

To become financially successful you have to first fulfill your basic needs and then try to control your spending.

Trust us, necessity and luxury are different. Very different.

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Necessities are things which are required to live a good and healthy life.

No one can reduce the spending on basic items. Whereas luxuries are the extra comfort, which makes our lives much easier and is a symbol of status.

Spending on luxuries can be reduced as it won’t affect our lives much.

For example, “housing is the basic necessity”, there is no argument in this fact.

But very expensive housing, for the sake of a better location or more space, is a luxury.

You may think it is a necessity, but getting comfortable with high standards and paying more you can is overspending.

In fact a lot of times, Indians go wrong with their spending. And misunderstanding luxury for necessity is one of them.

Why are you confused about identifying necessity and luxury?

why do regular funds have a higher expense ratio?

Yes, you’ve  got it right.

It’s social media and peer pressure.

With the increasing use of social media that shows perfect images of everyone else, it encourages you to buy the same stuff.

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Our society, family and friends also have the same effect on us. If everyone else is buying something then we feel like it is essential for us to spend on it too.

Thus, in order to prevent yourself from spending on what you think is a necessity; here are few questions that you should ask yourself.

1.Do I WANT this or NEED this?

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Before spending money on anything, this is the one question you need to ask yourself.

And be honest with your answer, or else, you will use this as an excuse to blow money.

Say, for example, takeout lunches.

Is it a need, of course, it is, we need to eat right.

But, spending Rs.500 on this everyday is not required.

Now, this might not be a big deal for high earners or the ones who are limiting their expenses in other areas.

But for many of us, this really adds up to a big expense

2.Do I need it now?

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This is the next question you need to find the answer to, is this item your need?

The role of planning comes in now.

You may need something, but you might not need to purchase it now.

Have you answered these three financial questions yet?

You can delay the same for some weeks or months and instead, put that money in something which you need right now.

For instance, I need a new pair of running shoes since my old shoes are worn out.

So, definitely I need them, but not today.

Putting a maturity and expiration date to your need is a good way of budgeting effectively.

Having an emergency need is a different issue, but apart from it, you should plan your needs.

3.If I don’t need it, then why and how badly do I want it?

A life where you keep earning and not enjoying, what you earn, is useless.

You don’t have to deprive yourself from all your wants.

Life will be quite depressing if you don’t spend on the things you like.

In fact, everyone should spend money on the things which they like. But it is also a good idea to ask why and for what purpose you need it.

For some of us, afternoon latte is the highlight of our day. We feel fresh and relaxed after having that latte.

So it’s worth putting money on it, as it brings us genuine happiness.

Whereas, for some, it’s just a habit and nothing more, and it’s time for them to rethink!

Sometimes spending regularly on the things which you don’t actually need and don’t even want that much, leads to overspending.

This is where you need to analyze your reason for spending.

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Conclusion

So, now you are well aware on how to differentiate between necessity and luxury.

A proper planned budget will help you save more and fulfill all your wants at the same time.

Suppose, you have now realized that you have to save more to reach your bigger financial goals.

You cannot starve or go without transportation, but you can stop your fancy afternoon coffee. But you must smartly make space for that latte in your budget.

Thus, just be a bit creative in planning your budget and control your spending. Rethink on the way you spend to save more and become financially successful!

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww