Maslow’s Hierarchy (Finance Version)

Maslow’s Hierarchy (Finance Version)

Before I start, let me be clear: Maslow doesn’t actually have a financial planning version of the hierarchy of needs.  But if he did, I’d assume it would look exactly like this article suggests!

Hierarchy of Needs

Most of us are familiar with Maslow’s Hierarchy of Needs.  From Physiological, to safety, to love & belonging, to esteem, and at the very top of that pyramid is self-actualization.  The pyramid and hierarchy state what we need as humans.  The bottom of the pyramid is our most basic needs (i.e, food, shelter, air, water), and the top is still important but less mission critical (ie, creativity, personal growth, pursuit of meeting). 

Very often, I’ll have similar conversations with clients as to what their hierarchy of needs for financial planning is.  Now, these certainly can be very personal, but I’ll attempt to list the order I would suggest if, instead of Rosen, my last name were Maslow.

Financial Hierarchy of Needs

At the bottom of my pyramid would be income.  This is the foundation we need to start any sort of financial planning.  One needs to maintain a job that will enable us to achieve the rest of the hierarchy.  This is why advanced degrees, sleepless nights, working overtime, and moving up the corporate ladder can be critical, as simply put, they are catalysts to even begin financial planning.  Unless you have inherited a fortune, almost every person out there will need income to make any of this go round.

Right above that is protection planning.  In theory, you can work until the day you drop dead.  Not fun, I know, but as long as you keep earning income, you have optionality.  The concern is what happens when man plans and God laughs?  If that income stream comes to a halt due to disability or death, the vast majority of people are ill-equipped to protect their families.  Thus, on my pyramid, I prioritize protecting your family as a critical next priority.

Now that you have income and are protected from tragedy, it is time to further protect yourself by addressing emergency funds.  It is mission-critical to have that rainy day stockpile set aside so that one little pebble in your shoe doesn’t put your finances on an endless death spiral of credit card debt, et al. 

Speaking of destructive debt, I have this next up on my importance list.  To be clear, I don’t care about your mortgage or car loans for this level.  Rather, I am more focused on toxic credit card debt at 20%.  This can totally thwart all your plans, and thus, if prevalent, must be the next thing you protect. 

I am almost resigned that retirement planning is this far down (or high up, depending on how you view it) on the hierarchy pyramid.  That said, most of us want optionality in our lives and to enjoy our later years without the constraints of work.  You can’t borrow for retirement, and it is very important to focus on retirement savings from an early age.  That said, I moved it this far down the list, and without the other items being taken care of, retirement is almost not even something we can discuss.

Estate and tax planning, I am going to lump together.  I’d likely rank estate planning over tax planning if I must, but my list, my rules!  Make sure we have proper documents in place if something should happen to us, and maximizing tax strategies is high on just about everyone’s list.  That said, all too many of us pay almost no attention to estate planning until someone kicks us in the behind.

College planning is at the top of my pyramid, but let me be clear, it is on the pyramid.  However, this is the area many people rank higher than I believe they should.  Now, don’t get me wrong, education is critically important to me, and I am saving vigorously into 529 accounts.  That said, paying for college is a luxury and also comes with the most options for funding (aid, grants, scholarships, and loans).  Additionally, I look at this list almost in reverse perspective.  What would happen if you failed miserably at anything on this list?  Think we can agree that our kids having student loans is the thing we can most stomach.

Well, there you have it, ladies and gentlemen, Andrew’s Maslow’s hierarchy of financial priorities.  Hope you found it interesting, and as always, stay wealthy, healthy, and happy.