Whether it’s a new car, house, clothing or food for dinner, the word “need” is often thrown around in a fashion that contradicts its true significance. One of the most basic personal finance principles is understanding the difference between needs and wants. Before you can prioritize spending, create a budget and truly set effective and reachable financial goals, it’s important to understand needs vs. wants and how they relate to your income.
Needs vs. Wants When Selling Your Business
This issue takes on additional significance for the business owner who is considering selling their business. Very early in the process of deciding whether or not to exit your business, as a business owner you must determine how much money you need or want to live out your quality of life and accomplish financial goals. Working with a financial planner, start with an analysis of wants vs. needs to help settle on a desired level of annual spending.
The Needs vs. Wants Pyramid
Imagining a pyramid can help conceptualize spending needs vs. spending wants. At the foundation of the pyramid is what we consider “needs” and includes assets or strategies that help the business owner and their family in the case of an emergency or catastrophic event. The first step is to create and maintain an emergency fund with 6-12 months of expenses in cash. Next, review insurance coverage, including health, disability, life and umbrella insurance.
Once the foundation of the pyramid is addressed, focus on financial independence. This area is somewhat of a hybrid of needs and wants. Each of us have a certain amount of money that we need each year to meet our basic commitments. After these commitments are met, we can move into the “wants” portion of financial planning and dream a little. Would we like to travel the world? Purchase a second home? Whatever your dreams entail, address them with an expected level of spending needed to accomplish this goal.
Finally, it’s time to move to the top of the pyramid. This section is composed purely of wants, and provides the opportunity to one day have to consider gifting to the next generation and fulfilling philanthropic desires.
Viewing needs vs wants in the context of the pyramid allows us to keep the horse before the cart and address first things first. Once these basic needs are met, individuals and families can begin to get into the more complex aspects of financial planning and wealth building and preservation. Contact an Anders advisor to discuss your business transition planning strategy and create a needs vs. wants pyramid to reach your financial goals.
