Similar to how Maslow talked about different needs for personal growth, there’s a ladder of money needs we all need to climb to be financially secure. In this blog post, we’ll look at Maslow’s financial hierarchy and figure out how to make a strong financial base.
Mindset & Hierarchies
Once you stop looking for what you want, you find what you need — Anonymous
Our mindset articles are the outcome of in-depth research aimed at combining personal finance and human psychology.
These brief dissertations are thoughtfully crafted to explore the solutions that many smart investors need. While there are many ways to make money, only comprehensive thinking and introspection can produce the finesse of a great value investor. The focus of today’s article is on a key and motivating aspect of financial planning that a lot of people are either ignoring or pursuing incoherently.
Understanding why each person behaves differently when starting serious investment attempts is a true conundrum. Some people like to begin investing when they are young (in their 20s), while others do it in their mid or late forties. Some people choose not to invest at all until they are confronted with the unfortunate circumstances of life.
The sooner we understand the different phases of life, the better we can equip ourselves and assemble our actions. Realizing our requirements and necessities motivates the desire and calling to invest.
Ironically, as we adhere to the largely predictable patterns of our existence, our needs continue to change and evolve.
The Maslow’s Hierarchy Of Needs
The concepts of need succession are incomplete without the mention of Abraham Harold Maslow. For starters, he was an American psychologist who was best known for introducing Maslow’s hierarchy of needs in his 1943 paper “A Theory of Human Motivation”.
Maslow’s hierarchy of needs is a theory of motivation that states that five categories of human needs dictate an individual’s behavior. Those needs are physiological, safety, love and belonging, esteem, and self-actualization.
In this theory, higher needs in the hierarchy automatically begin to emerge when people feel they have sufficiently satisfied the previous need.
Here’s what these categories mean –
≡ Physiological Needs
In Maslow’s Hierarchy, these refer to basic physical needs like drinking when thirsty or eating when hungry. These needs also relate to the pursuit of shelter, clothing, and survival. Maslow considered physiological needs to be the most essential of our needs.
If someone is lacking in more than one need, they’re likely to try to meet these needs first. For example, if someone is exposed to the sun, it’s hard to focus on anything else besides shade. Another example would be the need for adequate sleep.
≡ Safety Needs
Once people’s functional requirements are met, the next need that arises is a safe environment. Our safety needs are evident even early in childhood, as children need safe and predictable environments and typically react with fear or anxiety when these are not met.
Maslow pointed out that in adults living in developed nations, safety needs are more apparent in emergencies (e.g. war and disasters). This need can also explain why we tend to prefer familiar surroundings and why we do things like purchasing insurance and contributing to a savings account.
≡ Love and Belonging Needs
According to Maslow, the next need in the hierarchy involves feeling loved and accepted.
This need includes both romantic relationships as well as bonds with friends and family members. It also includes our need to feel that we belong to a social group. Importantly, this need encompasses both – feeling loved and feeling love towards others.
Since Maslow’s time, many researchers have continued to explore how ‘love and belonging need’ impacts well-being. For instance, having social connections is related to better physical health, and, conversely, feeling isolated (i.e. having unmet belonging needs) has negative consequences for health and well-being.
≡ Esteem Needs
Our esteem needs to involve the desire to feel good about ourselves. According to Maslow, esteem needs include two components. The first involves feeling self-confident and feeling good about oneself.
The second component involves feeling valued by others; that is, feeling that our achievements and contributions have been recognized by other people. When people’s esteem needs are met, they feel confident and see their contributions and achievements as valuable and important. However, when their esteem needs are not met, they may experience what psychologist Alfred Adler called “feelings of inferiority.”
≡ Self-Actualization Needs
Self-actualization refers to feeling fulfilled, or feeling that we are living up to our potential.
One unique feature of self-actualization is that it looks different for everyone. For example, for one person, self-actualization might involve helping others; for another person, it might involve achievements in an artistic or creative field like teaching or writing a financial blog.
Essentially, self-actualization means feeling that we are doing what we believe we are meant to do. According to Maslow, achieving self-actualization is relatively rare, and his examples of famous self-actualized individuals include Abraham Lincoln, Albert Einstein, and Mother Teresa.
However, for average individuals like us, it would mean having the freedom to pursue whatever we want in life and having the desire to work for a higher goal, such as engaging in philanthropy or empowering others.
The Maslow’s Pyramid
The Financial Hierarchy Of Needs
Maslow’s five categories of human wants, which make up his hierarchy of needs, can also be used to explain why people behave in certain ways when it comes to investing. The physiological requirements are what drive a person to look for work. People strive to work hard to put food on the table and pay for housing, transportation, and clothing for themselves and their families.
Once people have met these basic needs, they reach the second level in Maslow’s hierarchy, which is safety needs. It’s the safety concern that leads to the creation of an emergency fund and assessments of insurance requirements.
The third level which is love and belonging arises from physical and social associations. This level demands stability and status through the accumulation of wealth by building an investment portfolio. This is where the awareness about saving for retirement and paying off debt kicks in. Here, long-term survival and pleasure preservation take center stage.
It’s the fourth layer where maximum investors gain a rapid awareness to protect their esteem. This is also referred to as the need for financial independence. They plan for long-term care, retirement protection, children’s education, luxury, expensive hobbies, and vacations.
The final layer of self-actualization shovels more deeply into ideas like estate planning (making a will), tax planning, or business succession.
The Negative Consequences of Skipping Layers
The Motivation theory is a high-level roadmap to life’s success. It also acts as a guide for sequentially building wealth to attain the highest level of Maslow’s scale.
This roadmap is intricately braided, yet most investors get this wrong as they haplessly try to bypass the layers. Many people put themselves under an undue amount of stress and difficulty by attempting to quickly climb the career ladder to higher levels without meeting the requirements of the previous necessity.
Imagine this as a simple game of snakes and ladders, where the rules are that if you start at the bottom of a ladder, you can climb it to the top, but if your counter lands on a snake’s head, you must immediately slide back to the bottom.
Without a sense of fundamental “Safety,” the impulse to move straight to the “Esteem” layer is a terrible tactic. For instance, deceptive motivations presented as absurd success stories on social media persuade many people to immediately concentrate on their “Esteem” demands.
It is to be understood though, that expensive cars, club memberships, and private jets don’t happen without starting at the floor of the ladder. The ambivalence in this situation is not fantasizing about “What to acquire,” but rather figuring out “What should be the sequential way to acquire it.”
Another illustration of how individuals are attempting to cut through the layers is an overlay of “Love and belonging” without the satisfaction of fundamental “Physiological” requirements. Many people who lack money don’t think twice about taking out loans to pay for holidays and other worldly pursuits.
These loans fall under the category of personal loans that are detrimental to your financial stability. It’s a relentless pursuit of the fleeting sense of “love and belonging” at the expense of delaying or stopping the transition to “esteem” and “self-actualization.”
If you see this as climbing stairs, the prospect of skipping layers could seem alluring. The number of steps is halved when taken two at a time, but each one is essentially doubled in height. This raises your risk of falling and being badly wounded in the event of a tiny mistake.
Conclusion
Understanding the hierarchical progression via the many levels of the needs hierarchy is the best method for financial growth and investment. Irrespective of your age the requirements for each level must be met to swiftly transition over to the next one.
When investing is related to various life stages, it produces better results as every level necessitates a different strategy and approach. Understanding and reflecting on the stage you are in now will always help you go to the next one.
In their effort to quickly advance to the next stage, many investors frequently miss out on their existing position. This gives them less control to plan and fulfilling their life goals. It’s never too early or too late to begin investing, but a sequential strategy that is in line with the hierarchy of needs will yield better results. After all, progressing in life is not a sprint but a marathon!
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2 Comments
The comparison to snakes and ladders brought back memories of my youth.
A great relationship between life, needs and finance management. I believe it also depends on individual priorities and an individual’s capability.