Posted On Wednesday, May 25, 2016
Psychologist Abraham Maslow put forward a theory of motivation in 1943 called as the Hierarchy of Human Needs. Simply put it says that people are driven to satisfy basic biological needs first before moving up to meet the more complex needs for power and prestige.
Interestingly, Maslow’s Hierarchy turns out to be a useful guide on how to approach our various personal finance goals systematically...
Maslow’s theory of motivation provides insights into human behavior and why people make the decisions they make. According to this theory, “needs” drive human actions to achieve certain goals, from the most essential, physical ones to more abstract, emotional or spiritual ones.
The levels of needs in the pyramid are as follows:
1. Biological and Physiological – air, food, drink, shelter, warmth, sleep.
2. Safety – protection from elements, security, order, law, stability, freedom from fear.
3. Love and belongingness – friendship, intimacy, family, affection and love.
4. Esteem – achievement, mastery, independence, status, dominance, prestige, self-respect, respect from others.
5. Self-Actualization – realizing personal potential, self-fulfillment, seeking personal growth and peak experiences.
A person who is starving, in want of sleep and warmth is hardly concerned with abstract needs like artistic expression or spirituality. Once the elementary needs roti, kapda, makan are satisfied he can focus on good employment, proper place of stay, health and so on. When these are taken care of he turns to the need to associate and build relationships. After achieving these he wishes to earn the respect of others, gain confidence, become independent, etc. Finally such a person is free to seek experiences that bring self-fulfillment, express creativity and be benevolent.
Hierarchy of personal finance needs
For a simple reason the priorities of our personal finances seem naturally stacked up as Maslow’s pyramid – money is required to fulfill those needs. So the family’s bread earner must ensure that there is enough to eat, drink and a place to sleep for all his dependents. Next ought to be a cover against risks that can put one’s income, health in danger. The common way to cover these is through insurance. This also includes building a contingency fund set aside to take care of 3-6 months’ household expense, just in case an illness or accident temporarily affects the income.
Once these needs are taken care of a person would want to focus on the big, bulky goals like home purchase, provision for children’s higher education, marriage etc. And now he is in a position to pursue those lifestyle spends… that exotic vacation with family, the dream car. Also he might have money to spare for causes he likes and supports.
Finally when all else is sorted people may turn to the love of the arts, others to spirituality and finding the self, some might devote themselves to charity.
So here are the levels of personal finance needs:
1. Sustenance – Amount required for survival. We all generally get this right. Our savings is generally what remains after sustenance expenses.
2. Contingency – Contingency funds, life and health insurance come next on priority. Before setting out for investments for bigger goals ensure that you have adequate insurance covers. For building contingency funds as mentioned in the paragraph above consider a liquid fund.
3. Family – Investments for buying a home, vehicle, children’s education, their marriage, retirement are the next level of priority. These long term goals can be met comfortably with SIPs in a decent equity fund in the initial to mid stages and a multi asset fund as your goals get closer.
4. Lifestyle & causes – Exotic holidays, splurges, and causes to support might come next in the hierarchy. This amount can also be built through investment in equity funds.
5. Summit – Once one gets here he has the freedom to spend his net worth as he pleases. However the need to conserve and grow the accumulated corpus still exists. This is finally where inheritance comes into the picture.
Now, as criticisms on Maslow’s original hierarchy go, the needs pyramid is not a rigid one. Somebody might be happy to skip the lifestyle level completely and jump to the summit where he engages himself in self-actualization or giving away whatever wealth has been created to beneficiaries.
That said it is important that our spending, investments are more or less aligned with the levels of this hierarchy for having a balanced, smooth financial life. Imagine someone who puts the lifestyle needs before the needs classified as “family” here. Chances are he would end up accumulating expensive debts which would take away large shares of the money that could be invested and grown.
We hope you find the explanation of Maslow’s theory of motivation and its adaptation to personal finance useful for practice. Do write to us in case of any queries or feedback.
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