You might have heard of Maslow’s Hierarchy of Needs, a long-established theory in psychology. In it, human needs are characterized in a pyramid form, with the most basic, root needs at the bottom and the more aspirational needs toward the top.
Well, it’s time to take that concept and apply it to the world of personal finance! Introducing…..the Personal Finance Hierarchy of Needs.
Maslow’s Hierarchy of Needs
First, let’s review Maslow’s original hierarchy. In this, there are 5 levels: Psychological, Safety, Love and Belonging, Esteem, and Self-Actualization.
Here’s a summary of each level, starting from the base:
- Physiological Needs: food, water, sleep, etc.
- Safety: Security, Health, etc
- Love and Belonging: Family, intimacy, friendship, etc
- Esteem: Acceptance from others
- Self-Actualization: Reaching your potential
Personal Finance Hierarchy of Needs
Taking a cue from Maslow, we can construct a Personal Finance Hierarchy of Needs. Here, we can take some time to think about what’s truly most important – in other words, what we need to get done first, before worrying about the next level.
The levels of the PF Hierarchy of Needs are:
Base-level needs, Safety, Belonging, Esteem, Self-Actualization.
Here’s a summary, starting from the base
- PF Base-Level Needs: Money for basic day-to-day expenses, such as food/water, simple shelter, and basic medical care
- PF Safety: An emergency fund, insurance, and – last but certainly not least – retirement savings
- PF Belonging: A comfortable, middle-class existence, including such possessions as a quality home and transportation
- PF Esteem: Investments that can generate a decent amount of income on their own
- PF Self-Actualization: Being financially free, not having to worry about money
In my version of the Personal Finance Hierarchy of Needs, you’ll see that an emergency fund, and retirement savings – at least a really solid start toward this – are considered quite important. In fact, you can see that these things are placed as being more important that a comfortable home or transportation.
Now, this isn’t to say that retirement savings must be present before moving out of a slum, but they’re certainly necessary before moving into that dream home with the white picket fence, so to speak. You see where I’m going with this.
My Questions for You:
Have you ever thought of financial needs in this framework, from base-level needs up to more aspirational “needs”?
If you created your own personal finance hierarchy of needs, what would it look like?