Hierarchy of Financial Need

Leaning on the concept of Maslow's Hierarchy of Needs, a Hierarchy of Financial Needs was created.

There isn't a universal definition of what the Hierarchy of Financial Needs is. Among all of the pyramids that I've looked at, the one below resonated with me the most.

Applying the Hierarchy of Financial Needs.

This Hierarchy of Financial Needs is useful in two ways.

1. You can use it to create short-term goals and to prioritize what to do with your next dollar.

2. You can use it to motivate yourself to move up tiers. It's helpful to understand that when you work on your finance, Financial Freedom is achievable in the end.

Creating Short-Term Goals. Understanding where you are in the Hierarchy of Financial Needs can be immensely empowering. It not only clarifies your current financial status; but also helps in setting realistic and achievable short-term goals that pave the way for long-term aspirations. Here’s how you can practically apply each level of the hierarchy to set goals and motivate progression:

Cashflow and Basic Needs:

At this level, your immediate goal is to ensure that your income exceeds your expenses. This might involve budgeting more effectively, cutting unnecessary expenses, or considering moves that could help boost your income potential. For example, if you find that dining out frequently is draining your wallet, you could set a goal to cook at home during weekdays, saving dining out for special occasions.

Financial Security:

Once you've stabilized your cash flow, the next step is to safeguard against future financial shocks. This involves building an emergency fund that covers 3-6 months of living expenses. You might start by saving a small percentage of your monthly income or any windfalls, like tax refunds or bonuses, directly into this fund. Additionally, evaluating and updating your insurance coverage—be it life, health, home, or auto—ensures you are protected against potential financial burdens caused by unforeseen events.

Building Wealth:

With the basics secured, you can focus on growing your wealth. This might involve investing in stocks, bonds, or real estate. Setting near-term goals such as contributing to a retirement account like an IRA or a 401(k) plan, and investing in a diversified portfolio can be effective. For instance, you might set a goal to max out your 401(k) contribution or use the auto-escalate feature (if available) to slowly increase your investment into your financial freedom.

Financial Freedom:

Achieving financial freedom means having enough investments and savings to cover your living expenses without needing to work full-time. This is a good time to think beyond your money and explore more what drives you as a person and shift your activities to align with who you are, with financial considerations being a secondary thought.

Legacy:

Finally, if you're fortunate enough to find yourself in this category. It's a great time to think about how you want to be remembered and the impact you want to make. This could involve setting up college funds for your children or grandchildren, contributing to charities, or establishing a foundation. Near-term goals could include setting up a will or living trust and planning charitable donations. This is the time to think big and effect changes that serve the greater good.

Motivating Progress Through the Pyramid. For a lot to people, the hierarchy can also motivate you to climb to the next level and bring visibility to the possibilities beyond your own vision. For instance, once you see your emergency fund reach a milestone, like half its target value, you might be inspired to accelerate your savings or start thinking about investments if you haven’t already.

Moreover, visualizing your progress up the hierarchy can be incredibly motivating. Consider using financial apps or charts to track your growth in assets and reduction in liabilities. Celebrating small victories at each level reinforces your financial behaviors and motivates further advancement toward financial independence and beyond.

By following and applying this structured approach, you create a clear path for financial growth and legacy building, which not only secures your future but also allows you to contribute positively to the lives of others.