Money Management: Needs, Wants and Financial Goals

1Why this matters

Money is always limited, but the things you could spend it on are not. Every franc spent on one thing is a franc that cannot be spent on something else. Managing money well means choosing carefully: needs before wants, and today's spending balanced against tomorrow's goals.

2Money management

Money management is the process of planning, using, saving and tracking money so that it meets your needs and goals. It rests on three ideas: needs and wants, opportunity cost, and financial goals.

3Needs and wants

• A need is something essential for survival, health or basic well-being: food, clean water, shelter, basic clothing, health care and education.
• A want is something that makes life more pleasant but that you can live without: new earphones, a fashionable jersey, a cinema ticket, snacks.

The line depends on the situation. For a moto driver who receives customers and payments through a phone, the phone is a need for his work; for a student who wants it for games, it is a want. Meet needs first, then plan for wants.

4Opportunity cost

The opportunity cost of a choice is the next best alternative you give up. If Ishimwe spends 10,000 Frw on sneakers instead of a school geometry set and a revision book, the opportunity cost of the sneakers is the geometry set and the book. Thinking about opportunity cost helps you see what a purchase really costs.

5Financial goals

A financial goal is a specific amount of money you plan to have, by a certain time, for a certain purpose. Goals can be:

• short-term, within about a year (a school trip, a pair of shoes);
• long-term, over several years (starting a business, further studies, a house).

As you learned for personal goals, a good financial goal is SMART: Specific, Measurable, Achievable, Realistic and Time-bound.

Worked example: a SMART savings goal

Written by Ganzaa. Mugisha, a school leaver in Rwamagana, does deliveries on foot and earns about 15,000 Frw a week. A second-hand bicycle costing 90,000 Frw would let him make more deliveries.

1. Vague goal: “I want a bicycle some day.” It has no amount and no date.
2. How much can he save? After food and rent he can save half his earnings: 15,000 ÷ 2 = 7,500 Frw a week.
3. How long? 90,000 ÷ 7,500 = 12 weeks.
4. SMART goal: “I will save 7,500 Frw every week in my SACCO account for 12 weeks, to buy a 90,000 Frw bicycle for my delivery work by the end of the term.”
5. Check: specific (bicycle), measurable (7,500 a week, 90,000 in total), achievable and realistic (half of his income), time-bound (12 weeks).

Practice