Many can’t achieve the five levels in hierarchy of financial needs
IN this period of uncertainty, when jobs are scarce or lost, financial instability haunts many of us. We worry so much that it has taken a toll on our health and mental stability. It’s not just us. Millions of people across the globe are facing similar situations.
We must have money and some wealth to spend and save on a daily basis. Wealth advisers keep drumming into us that we need to save at least 20 per cent of our income monthly. But now, that seems hard.
There’s always money we need to fork out. And this somehow reminds me of Abraham Maslow’s “Theory of Human Needs”. A behavioural scientist, he wrote this highly acclaimed theory in 1943 about the five-tier hierarchical human needs.
He argued that Man has needs, namely physiology, safety and security, love and belongingness, self-esteem, and self-actualisation. It is a motivational theory often depicted as hierarchical levels within a pyramid.
From the bottom of the hierarchy upwards, it addresses the human need for shelter, safety, security and food in the basic or physiological needs. Humans also require psychological needs, like love and relationship, and self-esteem and prestige. The final one, the pinnacle of one’s life, is self-actualisation, for which it inspires a person to achieve his or her full potential.
Now, it appears financial security has become the utmost important factor that covers all types of needs — basic, psychological and self-actualisation. We’d be in denial if we say financial security is the least important consideration in these hard times.
A survey by the Pew Research Centre on American citizens from April 7 to 12 this year found that 50 per cent of those living in the low-income bracket worried about their ability to save enough money for retirement, compared with 37 per cent and 26 per cent of middle-income and upper-income earners, respectively.
If we’re to compare with our situation in Malaysia, the B40 group can’t even start to speak about saving money for retirement as many are surviving hand-to-mouth. Many Malaysians in the low-income bracket have spoken about the difficulty of paying bills or the amount of debt they have to repay and the fear of losing their jobs.
They worry about taking a pay cut with this prolonged period of the Covid-19 pandemic and so much more. Browsing the Internet the other day, I found an interesting read on the New York Life Investment website, which explores how Maslow’s five-tier theory applies to financial needs, pinning down the steps for a strong financial foundation.
What are the five levels in the hierarchy of financial needs, you may wonder?
The first in the five-tier pyramid is the cash flow and basic needs that entail our food, housing, utilities and daily expenses. It’s the foremost basic need that ensures the fundamentals, including the physiological needs, are covered financially.
The second tier is financial safety, covering insurance and emergency funds to prepare for unforeseen events and risks. As a safety cushion, emergency funds should cover three months of living expenses in case of an accident, an unexpected health or family issue, or losing a job.
The third tier is about accumulating wealth. At this level, the focus shifts to growing assets for long-term success and longevity.
The fourth is about financial freedom, for which long-term care and children’s education are found within this category. These financial needs are linked to esteem needs, such as self-respect and personal accomplishment.
The final pinnacle is the legacy. This entails estate planning, tax planning, and business succession planning, connecting with self-actualisation in Maslow’s pyramid. The reality is that many of us can’t achieve all the five tiers.
It’s good enough if we can manage efficient cash flow to cover our basic needs although it’d be a worthwhile experience for all of us to learn financial planning on any given situation.