The Hierarchy of Financial Needs

I was reading Carol Schultz’s new book over the weekend and one passage in particular stood out to me:

“I remember attending many seminars that were supposed to be about financial management and the first topic was investment. Yeah, right. I just wanted to get the bills paid on time. With all the books, seminars, and discussions very few even touched on the challenges I faced.”

How true. The first thing I thought of was Maslow’s hierarchy of needs. You might remember this from science class in high school:


The concept is that you can’t move onto the next level until you’ve satisfied the one below. You’re too worried about the basics to concern yourself with more advanced things. Not only that, but if you’re cruising along at the top and you stop breathing, you’re suddenly back at the most basic survival levels again.

It’s a simple and neat way to effectively organize all of life’s needs. Which got me thinking back to the passage:

Financial Applications

With so many financial concepts and the unique priorities and approaches of every human being, can we even define a similar hierarchy for spending money? I think we can certainly try.

I started to do it a few years ago when I tackled the concept of “shutting down” progressively higher-priority items from the budget in case of a pay cut, emergency, or other income choke.

I think that worked for budgets, but I want to take it a step further. There are other things we can do with money besides spending it. I propose the following hierarchy of financial needs, each requiring the fulfillment of the previous to be effective:

  • Level 1: Surviving
  • Level 2: Thriving
  • Level 3: Luxuries
  • Level 4: Accumulating Assets
  • Level 5: Investing & Businesses
  • Level 6: Sharing

The Details

Here’s a little more information about each stage, what I think it means, and why I think it works:

Level 1: Surviving

homeless-manTo me, surviving is exactly what it sounds like. If you don’t have a. food, b. a place to live, and c. clothing to put on, you’re going to be hard-pressed to get very far (you’re either hungry, homeless, or naked).

So the first order of business is getting those basics under control. Thankfully, both food and clothing are very flexible budget items and both can be “stocked up” for bad times. The kicker is a place to live, since rent or a mortgage are usually a nice chunk of change.

As a result, we hear a lot more about homeless people in America than we do about people dying of starvation or lacking clothing. It’s just a lot harder to make it work if you have no income. Even if you have some income, you’re likely to be relying on things like a cash advance to take you from one paycheck to the next.

Level 2: Thriving

I define thriving as moving past the basics, but not to the point where we’re indulging in things we want, but rather in things that enhance our lives.

A good example would be an economical car that you buy for getting to and from your job and to the grocery store in the evening. Another example might be a simple cell phone that you can use to communicate with friends and family and make social plans.

What else makes the cut for me? Among many other things–certain types of basic insurance, investments in your career, inexpensive forms of family entertainment, spending on health (including sports), and home maintenance and basic improvements.

Level 3: Luxuries

white-poodleHaving defined Levels 1 & 2, getting a handle on Level 3 is easy—it’s simply everything else.

In fact, it’s 100% of the things we say we “want” and probably even 50% of the things we say we “need.” We forget that even the best “excuses” in the world don’t change the fact that there are plenty of things we simply don’t have to buy.

Having said that, without having at least a few luxuries in our lives, we won’t be content enough to move onto–

Level 4: Accumulating Assets

Having found steady income and things to spend that money on, the next logical step for most people is accumulating some kind of wealth, on however small a scale. This usually starts with simple things, like emergency funds and savings accounts.

Another frequent goal that belongs to this level is a real estate purchase. For many families, this is both the single biggest goal, asset, and piece of debt they will take on. But even with a small asset base like a couple of hundred dollars in a savings account, we can move onto–

Level 5: Investing and Businesses

businessman-dancingFinally, we’re getting into the meat and potatoes. This is the level of wealth accumulation, of the entrepreneur, the business owner, and the super-saver. This is the level that separates the people who put a dollar away every day and forget about it, and those who make that dollar do push-ups and hand-stands for them while they sleep.

And they do it with good reason. After their own needs and those few luxuries are met, they can use all that extra cash to get to–

Level 6: Sharing

Seriously—there are only so many toys you can buy, trips you can take, and parties you can go to before you realize that the real power of money, the lasting power, is the ability to make a difference in someone else’s life.

Honestly speaking, intense gratitude is what drives my greed. Someday, I want to be able to turn around to each and every one of the people who helped me along in some way, make a lasting difference in their lives, and then move on to doing it on an even larger scale. That is my mission.

Chime In

This is one interpretation of Maslow and how he would view money. I’m curious to see how you would organize the various concepts of personal finance into stages. Please share your thoughts in the comments!

Pyramid via Wikipedia; other photo credits: homeless man, the poodle, and the performing businessman.

7 thoughts on “The Hierarchy of Financial Needs

  1. I love the hierarchy of needs and I refer to it all the time. It can be applied in so many ways and your financial spin on it is great.

    I also like how you put the poodle picture in the luxury section. I think many people believe that caring for their pets is a level 1 responsibility. Although I don’t disagree that you have to care for your pet once you have one, the sheer act of taking on that responsibility is a luxury. My mom grew up on a farm so most of her animals either had a job to do (horse, sheepdog) or provided food, so I don’t have the same view as a lot of other animal lovers out there

    1. I completely share your sentiment–the responsibility of upkeep of anything (pets, cars, homes, etc.) has nothing to do with the initial decision to take it on, which is what really matters.

  2. This is a great way to break this down! What I think is interesting is how even in your Level 1 Surviving area, there can be a huge discrepancy between what actually fulfills the need and what is just an extra “want.” Sure you need clothes, but you don’t need new, designer labels, etc. So I think you can get in trouble when you start making huge improvements to Level 1 before you have fulfilled some Level 2 needs.

    1. Exactly–I guess that was self-evident in my own head, but I suppose that’s exactly how we get ourselves into trouble and start buying more stuff, right??? 🙂

  3. This was a great interpretation. Right now, we’re teetering between Levels 1-3. We have the basic necessities: food, clothes, shelter. We’re making ends meet, although it’s hard. We’ve splurged on luxuries when we thought we had it, when really we didn’t. Once we eliminate our debt, we can continue to move up the ladder.

  4. I love this! It’s a great representation of people’s financial needs. I’d say I’m around level 3 at the moment but I’m hoping to get to level 4 soon.

    1. Thanks! I would say I’ve been bouncing back between 3 & 4 for a few years (thanks to the recession!).

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