Visualizing the Hierarchy of Financial Needs
Behavioral scientist Abraham Maslow wrote “A Theory of Human Motivation” in 1943, arguing that humans worldwide are influenced by a “hierarchy of needs”.
This theory organizes human needs across five levels, where needs in the lower end must be satisfied before progressing onto the next level. At one end are physiological needs such as sleep and shelter, while at the other end are esteem and self-actualization.
This Markets in a Minute chart from New York Life Investments explores how Maslow’s theory applies to our financial needs, pinning down the steps to creating a strong financial foundation.
Cash flow and basic needs:
Covering food, housing and daily expenses. Ensuring the fundamentals, including our physiological needs, are covered financially.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.Accumulating wealth:
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.Financial freedom:
Long-term care and children’s education are found within this category, along with retirement savings and vacations. These financial needs are linked with esteem needs, such as self-respect and personal accomplishment.Legacy:
Estate planning, tax planning, and business succession planning all fall within this category, connecting with self-actualization in Maslow’s pyramid.
