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Moving upward, the next level of the pyramid is safety. We all want to feel safe and secure, but we need to make sure our physiological needs are met first. Maslow then goes on to identify love and belonging, and then self-esteem, as the next most important human needs that must be fulfilled.
According to Maslow, self-actualization, or the ability to learn, grow, and accomplish goals whatever they may be , is the ideal state we all strive for. This ideal state, however, can only be reached if all the preceding basic needs have been met. The hierarchy of financial needs works in much the same way and presents a similar goal. Once we have addressed our basic financial needs, we can move up the pyramid of financial needs to the top: financial freedom.
The base of the pyramid represents the financial needs that must be met before any others can be realistically contemplated. Without a sufficient income, paired with sensible spending habits, none of the other steps to building a healthy financial outlook can be achieved. Like our basic needs for food and warmth that Maslow identified as the base of his hierarchy of needs, managing our income to produce a positive cash flow spending less than we are making and taking care of unavoidable expenses such as housing and groceries set the foundation for the next level.
Also, be sure to check out our growing list of actionable financial tips for managing day-to-day finances. With your basic financial needs addressed, you can move on to the next level of the pyramid—building your emergency fund. Life comes at you fast.
An emergency fund acts as a financial buffer and ensures that you are prepared for unexpected expenses. It just seems like common sense, right? The ability to cover financial emergencies without having to rely on debt instruments like credit cards or high-interest short-term loans makes good financial sense. For people who are struggling to navigate the world of personal finance, the financial hierarchy of needs can be instructive.
You know you need to have an emergency fund, but how do you go about doing that—where do you start? Looking at the pyramid, the answer is clear: make sure you have your income and basic financial needs sorted out first. With your basic financial needs handled and an emergency fund cushion established, you can focus on other savings. These miscellaneous savings are your first step or a continuation of other steps you have already made toward saving for your future.
This stage of the financial planning hierarchy is also sometimes referred to as the accumulation stage, because at this stage excess income is being diverted to savings accounts where it can accumulate. While it is true that the previous two stages of the financial hierarchy are important steps toward the goal, the accumulation stage is your first real taste of financial independence.
With your survival needs accounted for, an emergency fund in place, and your excess income accumulating, you can confidently protect your assets and secure your financial future. These aspects of future-proofing your financial journey may seem frivolous, especially if you are young, but the peace of mind that comes with securing your financial future can be invaluable.
This stage is also a time to think about your financial future in another way—your credit score. For some people this will mean building credit, and for others it will mean repairing distressed credit scores. Building your credit score results in more options and often lots of money saved in the future.
Once you have reached this stage in the financial hierarchy of needs, you are in a good position to work on your credit; before this stage it can be tough to appropriately build or repair credit. The financial hierarchy of needs represents a path toward financial independence, with each successive stage dependent on the last. It takes most people decades to progress forward to the next step. Some may lose sight of their goals in the process.
During this stage, people have more money than ever before. Unfortunately, this can sometimes cause them to become distracted and take their foot off the gas. Stay focused on your goals and spending. Have a plan for combating lifestyle creep.
And most importantly, maximize your happiness through intentional spending. Review your financial needs every year. Many parents have children that leave home, which could present the opportunity to downsize or change certain spending habits. Taking these actions could propel you higher towards freedom! During the wealth accumulation phase, test out your new upcoming lifestyle. Find out what you like about it and any potential pitfalls you may face. Also, think about how you will spend your time.
It can be overwhelming to go from being time-constrained to having so much more free time than ever before. It was not only shocking, but a struggle for me to have such a surplus of free time. So, plan ahead and know what you want to do with all your new-found freedom! You made it! It was a long road and you finally reached your goal. Over the previous 3 stages, you have built positive financial habits.
When you reach the Financial Independence stage, celebrate! Take your time. Go do the things you have always wanted and dreamed of doing! There are 3 main strategies for reaching financial independence.
Most people use a combination of all three to reach their own version of financial freedom. For years I imagined achieving financial independence. I dreamed of being a nomad and traveling the world. So I did! I was able to walk across Northern Spain, surf at world-class breaks in Indonesia, and explore Thailand by motorbike!
Personal finance is personal. There is no right or wrong way to achieve financial independence. Determine which works best for you and start. The top step on the Hierarchy of Financial Needs is your legacy. You have put in a tremendous effort your entire life to get to this point.
In a recent Conference-Board study , they found that almost half of the workforce is not satisfied with their jobs. You have spent decades to get to the point where you are today, financially secure and independent. The goal of life is not a self-serving one. But, one that allows you to share your special talents with the world. We all have them. Give back.
Use your gifts and spend your money to leave a legacy. Further the causes that are most important to you. Make it your goal to arrive at the legacy phase as quickly as possible. After all, you now have the time and resources to make a difference! The Hierarchy of Financial Needs has proven true throughout my life. When I graduated from college I got a job. It provided for my basic needs and allowed me to start saving. Less than a year later, I was laid off.
Immediately, I carefully watched my spending and lived off my emergency fund. A few months later I found another job. This one met my basic needs and allowed me to focus on saving again. As my money grew, I was able to fixate on accumulating wealth and working towards financial independence. I wanted to leave a legacy. It took fulfilling each of the previous stages before I understood what I wanted next.
As you advance through the Hierarchy of Financial Needs a pattern develops. Each stage requires that you learn and build upon previous knowledge to progress higher. Successful people never stop learning and setting goals. These two habits show up over and over again on the Hierarchy of Financial Needs.
They are necessary for you to move forward. Commit today to achieving financial independence and retiring early. Leave your legacy and help make the world a better place! What goal can you set today that will push you forward to the next stage of your hierarchy of financial needs? Comment below. Your email address will not be published.
Save my name, email, and website in this browser for the next time I comment. Stage 1: Financial Survival Our most basic need is to survive. Current Interest Rates on Savings Accounts! Stage 3: Wealth Accumulation Once you reach financial stability, you can begin to focus on the accumulation phase.
Have Questions? I Can Help! Advanced Techniques As your wealth grows you may consider more advanced techniques. Common Traps The wealth accumulation stage is the longest. Additional Tips Review your financial needs every year. Take some time to reflect on the following: How can you make the world a better place?
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This diagram showing the hierarchy of financial needs is a direct spin-off of American psychologist Abraham Maslow's famous concept. The hierarchy of this framework is divided into five levels, forming a pyramid. The most fundamental needs are at the bottom of the pyramid, with each. The Hierarchy of Financial Needs is a revolutionary yet simple model that provides clarity regarding what people need to do to realize their.