Hierarchy of Financial Needs - Do you know yours?

Updated: Jan 31

Abraham Maslow is a behavioural psychologist who is best known for his work on human motivation theory. His work showed that people are influenced by a set of psychological needs and typically they can't move onto the next step until they have the current need met.

What's this got to do with money management? I'll explain as we progress. Maslows theory dates back to the 40s and the world has change significantly since then. The majority of his theory still holds water, however, a glaring gap is the financial needs we all have especially in such an volatile and uncertain world.

What is your biggest financial asset?

Most people I know say their house, car or life savings first when asked this question. When in reality it's most peoples income. If you earn €50000 a year(average full time industrial wage in Ireland) and work for next 35 years that's the equivalent of 1.75million worth of an asset. So your ability to earn an income is your greatest financial asset.

So the question is how do you use this asset most effectively to achieve the goals and plans you have in life?

No two plans the same:

Each of us are unique with different personal and financial circumstances. Some of us are starting out in our careers, some are changing careers and others are finishing up. So it makes sense that no two financial plans are the same. However, every plan should follow the same set of principles to ensure you're income and family are fully protected and maximised.

Financial Hierarchy of Needs

What are the five levels in the hierarchy of financial needs?

  1. Basic needs: Covering food, housing and daily expenses. Ensuring the fundamentals, including our physiological needs, are covered financially.

  2. Financial safety: This covers insurance and an emergency fund to help prepare for unforeseen events and risks. As a safety cushion, an emergency fund should cover three months of living expenses in case of an accident, an unexpected health or family issue, or losing a job.

  3. Accumulating savings: This includes growing investments, paying down debt, and saving for retirement. At this level, the focus shifts to growing assets for long-term success and longevity.

  4. Financial freedom: Long-term care and children’s education are found within this category, along with retirement savings and holidays. These financial needs are linked with esteem needs, such as self-respect and personal accomplishment.

  5. Legacy: Estate planning, tax planning, and business succession planning all fall within this category, connecting with self-actualization in Maslow’s pyramid.

Naturally, financial needs can shift based on a given situation. But as a general rule of thumb, moving along this path can help create an enduring roadmap for financial heath.


The importance of a needs-based Financial Plan

To navigate the hierarchy of financial needs, the importance of having a robust financial plan comes into focus. Especially during times of uncertainty like now, individuals need a framework that accounts for changing life circumstances, such as a new job or purchasing a house.

And when individuals move up each rung of the financial needs pyramid, they must also recognize how their tactics might need to change to best pursue their financial goals.

Building a stronger awareness of financial needs can help individuals make more informed choices, on both a micro and macro level—from day-to-day purchases to long-term investment decisions.

* This is not financial advice but my own views based on my experience in the industry. If you want advice I recommend you talk to a qualified advisor.

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