Financial Needs

Financial needs refer to the minimum amount that an individual requires to pay for the necessary expenses that help them maintain a basic standard of living. Such requirements, which are prioritized over the wants, include housing, groceries, utilities, healthcare, and transportation.

In personal finance, fulfilling needs is the foremost priority for the survival of people, their families, and their dependents. When individuals have limited financial resources but extensive demands, they should segregate these potential expenses into the categories of needs and wants. Hence, needs cannot wait, while wants can be postponed.

Financial needs are the basic survival requirements of a person and their dependents, including shelter, food, utilities, and healthcare. Meeting such needs is the foremost consideration for any individual; thus, they are mentioned at the top of the priority list of financial expenses. The other necessities that follow these fundamental expenses include meeting debt obligations such as credit card bills. Moreover, with the increasing awareness and need for financial security and retirement planning, savings and investment have also become a dispensable part of financial needs analysis. 

Let us now have a look at the various unavoidable financial expenses that account for the basic needs of an individual:

• Food: Humans need food for survival, and therefore, grocery expenses on grains, vegetables, fruits, dairy, etc., are considered essential.
• Housing: Another significant expense is paying off the rent or house loan EMIs since everyone needs shelter.
• Transportation: People travel or commute for their jobs, schooling, and other purposes. Therefore, they require a mode of transportation and incur costs in the form of fuel expenses or fares.
• Utilities: Gas, electricity, and other utility bills form another critical expense category for meeting the basic needs of daily life.
• Insurance: This expense helps people prepare for unforeseen future obligations, such as medical bills or the loss of valuables.

Financial needs analysis helps people determine their fundamental monetary requirements and efficiently budget their needs and wants. Given below are the steps involved in gauging the basic financial expenses of life:

• Understanding Current Financial Position: The foremost step is to have an overview of the prevailing financial position, such as expenses, income, needs, and wants.
• Financial Planning: The next step is to prioritize and plan the upcoming basic financial expenses, such as paying off the rent or electricity bills monthly, quarterly, or annually. 
• Ascertaining Uncertainties of Life: The third step is to determine the potential risks and unpredictable financial obligations, such as job loss, death, or other circumstances that may require a financial backup. 
• Budgeting: Individuals can use a 50/30/20 rule to plan their financial budget according to their income and expenses and efficiently allocate their earnings to accomplish their needs, wants, and savings.

The 50/30/20 rule is a critical guideline employed by individuals for budgeting personal finances. According to this plan, a person should use:

1. 50% of their income to pay for their basic needs like grocery, utilities, housing, and health amenities; 
2. 30% of their earnings should be spent for their leisure, fun, and other wants and  
3. 20% of the money should be allocated to meet debt obligations, savings, and investments. 

Although the applicability of this plan depends upon an individual's status quo, earnings, and personal goals, it helps people differentiate between their short-term wants and long-term financial needs. Moreover, people can fulfill their bare ends either through internal sources like their personal income or financial help from friends or family members or can approach external sources like bank loans, government grants, etc., for help during their hardships.

Determining financial needs serves as a mirror to the basic requirements of a person and their family. Let us understand its relevance in personal finance through the following examples:

Example #1

Suppose Mr. Bill has a monthly income of $5,000. He has 2 dependents, a wife and a daughter to take care of. Further, he uses the 50/30/20 rule and thereby left with $2,500 to spend on his financial needs as follows:

• Food: $650 on the grocery items;
• Housing: $550 paid as monthly rent;
• Transportation: $200 paid for car's fuel and $100 for daughter's school bus fees;
• Utilities: $700 spent for gas, electricity, and other utility bills; and
• Insurance: $300 over a family health insurance plan.

Further, he has $1,500 left to meet his family's wants, such as entertainment, dinner at restaurants, and other fun engagements. He also invests the remaining $1,000 in mutual funds to achieve future financial freedom.

Example #2

According to a survey conducted in 2022-23, which emphasizes the significant financial challenges faced by Asian Americans, particularly those living in poverty. The conditions are so miserable that these people can barely save for emergencies, struggle to pay their utility bills, and depend upon food banks. Further, the language barriers and limited proficiency in English add to their economic struggles, limiting their job opportunities and adversely impacting their everyday life. Indeed, many of them rely upon the support from their family or friends and avoid seeking help due to fear of judgment. Eventually, the education of the Asian American community and their familiarity with the U.S. financial system are considered necessary for overcoming these obstacles.

Example #3

A Pew Research Center survey reveals that most Black adults report that their finances cover basic needs while leaving them with some extra cash, even amid COVID-19 disruptions. However, financial difficulties persist since less than half of them have an emergency fund, and some work multiple jobs to make ends meet. Moreover, black Americans experience more economic insecurity compared to the overall U.S. population, with notable disparities based on their income and education. Further, Black adults with higher income and education levels are more likely to have emergency funds and feel financially secure. The number of Black adults with an emergency fund has surged from 27% in April 2020 to 35% in February 2022, despite very many challenges.