Hierarchy of financial needs

If you’ve ever taken a psychology course you may be familiar with Abraham Maslow’s Hierarchy of Needs. In ascending order, the needs are:

• Physiological
• Safety
• Social/Belonging
• Esteem/Achievement
• Self-actualization/ Reaching your potential

The theory states that people need to fulfill their basic needs before devoting energy to the higher levels. So, for example, you can’t focus on your job (safety) if you are hungry or haven’t had enough sleep, and you can’t focus on friendships or reaching your potential if you are about to lose your job.

The hierarchy of needs is simply a way of setting priorities in your life.

We can apply a similar concept to prioritizing our financial needs.

When you’re thinking of your finances your first consideration shouldn’t be how to invest your money when you are having trouble paying your bills.

The first step is to know what, how, and in what order things need to be done. Begin at the bottom of the priority pyramid and work your way up:

1. Survival

First you need to pay for all the things that you need to survive. We need to fulfill our basic needs before we can move on to the next level. The most basic financial need is income to cover your necessary living expenses of food, shelter, and clothing.

2. Security / Sustainability

Sustainability would be moving past the basics, but not to the point where you’re indulging in things you want, but rather in things that enhance your life. You could live happily at the sustainability level for a while but you are not necessarily safe there. One small injury or accident would derail everything, so ideally you’ll soon reach the allocation level. 

3. Asset Allocation

At this level you make more than you spend. So, you are able to save for future unplanned expenses. Having found a steady income and things to spend money on, the next logical step is accumulating some kind of wealth, on however small scale. This usually starts with simple things like emergency funds and savings accounts.

4. Independence

Financial independence means you are able to live on income from pensions, investments or passive income such as dividends, royalties and rental income. It often refers to the retirement years, but it can also mean the freedom to work how, when and where you like. It means not having to worry about money.

5. Utilization

This is when you know you’ll never run out of money. Hence, you make a difference in someone else’s life. Make charitable donations to a cause you believe in. help your grand-children with their education expenses or start a business. 

Final thoughts:

• In much the same way you master each level in your favorite video game before moving on to the next, prioritize your financial needs.
• The bottom three rungs, in the hierarchy of financial needs make up your foundation. Once they are in place you can move up to achieve your full potential.

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