People tend to review their financial health regarding their credit or income levels. But these metrics are not a sufficient condition for the assessment of one’s economic life.
The knowledge about personal incomes is good, but being aware of your debts and the pattern of expenses is essential in establishing your financial position.
The basic needs underline the physical, psychological, and social requirements that we should have to realize our potential as humans.
Based on this knowledge, you can, therefore, construct a hierarchy that reflects your financial needs.
Our article analyzes how the financial needs parallel to the Maslow’s concept and present a basis for individual financial needs analysis.
A need is a requirement that is essential for a specific fulfillment in life. Financial necessity is, therefore, a psychological and economic requirement that ought to be fulfilled by the use of money. It is an obligatory desire that requires people to use the money to solve it for their psychological and physical well-being.
The basic steps that will help you determine your hierarchy of financial needs, and transpose it into becoming wealthy:
Below is a hierarchy of financial needs that parallels Maslow’s hierarchy.
Before you can think of any other financial goal, you have to ensure you are self-sufficient in the basic human needs. The primary costs include buying food, getting a proper shelter, and purchasing clothing. Before thinking of savings and investments, it is right first to ensure you are sufficient in these fundamentals.
At the same time, you have to create a balance between expenditure and income. It will ensure that you do not run into debts or spend on luxuries instead of meeting elementary needs as your priority.
In fulfilling your financial needs, you need to think about the financial setbacks that may arise in case of unusual circumstances. This is where insurance sets in to cater for the emergency spending that you may not have the capacity to finance individually.
Once you have satisfied your basic financial needs, you need to seek some form of insurance protection. You may consider having life insurance to protect yourself against incidences of disability and injury. Once you have started owning assets you also need to get home or property insurance to ensure your properties are safe.
You also need to invest in an income-earning commitment, mostly a career, to guarantee yourself of incomes in the future.
Once you have insured your assets, you can now choose to start building up your wealth portfolio. That is where credit comes in. To own capital-intensive properties such as real estate requires that you commit to borrowing. Leveraging through lending is necessary for assets acquisition.
You can also choose to acquire mortgages to own homes or buy a car by accessing low-cost capital through credit from financial institutions. Salary or savings may not be enough for you to commit to these kinds of financial needs. Credit comes in as your financial savior and makes all the incredible breakthrough at this stage.
To enjoy the good things in life, you have to save up for them. Being able to take your family out on a dinner or entertain your friends. You can use your savings to enhance your worth, build social networks and gain respect from other people who see you as responsible. Savings can be used to meet personal goals such as going for vacations.
At this level, you can meet your expenses comfortably from multiple sources of income. A pool of investments, both active and passive, are the sources of revenues. Pensions are also the source of livelihood at this stage when you have already retired from your career. You should also be getting rental incomes, dividends payouts, or royalties at this stage of the financial needs hierarchy.
This is a stage when you are retired, or you have already accumulated investments, and money to spend is no longer a problem. This is when an individual should have the freedom on how to work when he/she feels appropriate to work and where they think they need to work from. Money is no longer a problem.
One of the psychological needs of human beings is to have a legacy to be reckoned with. After all the life achievements and death is the next on the agenda, you need to engage in charitable projects and impact your society positively. Helping other people groom their businesses also comes in at this stage.
We hope we convinced you that it is essential to prioritize your financial decisions to know which financial needs should be fulfilled and at what time. Prioritizing your needs ensures you live an organized and happy life, through meeting all your goals at the right time and becoming wealthy at a certain point.
John has been a freelance writer for the past 3 years. He worked for 4 years as a Mortgage Consultant and a Financial Advisor. He also worked for 2 years as a Loan Manager for a medium sized company that handled bad credit loans, car loans and personal loans. We are excited to have John in our team!
John writes about Finance, Philosophy, Money Saving Tips and much more. He is a proud Member of Financial Advisers Australia (AFA) and has Cert IV in Financial Services.