Needs & Wants In Financial Planning

Maslow’s Need Hierarchy Theory is a practical and wise approach to how you can plan your financial outlay to take care of basic needs as well as wants. What it calls for though is a proper understanding of how to differentiate between the two



Avoiding being poor and hoping to be rich are both goals that should be addressed. The first step to achieve this is to identify and prioritize them. To do it efficiently you should understand the psychological needs that drive life goals. A financial plan is not just about arriving at a destination but also about the journey being undertaken. Ends and means are both important, and psychological needs are relevant to both. While creating a financial plan and planning for financial goals, it is a best practice to divide your financial goals between needs and wants. When we ask people what their needs are, it differs from person to person.

This is because everyone might be at different stage of life and hence may have different needs. For a person below 25 years of age, the pressing need is often education; a person between 25 to 30 would often have a first job and the needs at this age would be first home, first car, marriage, etc. At age 30 to 40, the needs differ as they would include a child’s education, maybe a second job, accumulating wealth, etc. While in age 40 to 60, the needs change to may be upgrading home, child’s marriage, child’s higher education, etc. and age above 60 is a retirement period and here is when you may wish to pursue your hobby or wish to go on a world tour, cover medical expenses, and so on.

Change In Needs With Change In Age



Maslow’s Need Hierarchy Theory

To understand such differing psychological needs, Abraham Maslow, a famous psychologist, came up with the idea that people are motivated to satisfy certain needs that line up in a hierarchy. This is better known as Maslow’s Need Hierarchy Theory. Hence, they move up to the next stage only if their earlier needs are fulfilled. What are those needs, how are they stacked up, and how this relates to financial planning is what needs to be understood here. Before understanding how those needs relate to financial planning, we need to understand how the needs are different from wants. Refer to the box item on a more elaborate explanation. (pg no 5)

What is Maslow’s theory and why at all needs matter while financial planning?



Here we would have to understand what is Maslow’s theory and finally how it is linked with financial planning. The point he made in this theory is that humans require more basic needs to be fulfilled before they move towards higher level needs. As per his theory, if we try to attain self-esteem while even the basic needs such as regular steady income or a stable family life are not met, we may feel stressed out. This theory helps us to understand the steps that you need to follow to achieve self-actualization.

Psychological : First, if the basic physiological needs are not satisfied the human body may not function properly. Therefore, Maslow has considered physiological needs as the most important of all.

Safety: As per Maslow, safety needs include security, law and order, stability, protection from elements and objects, no fear, etc.

Love and Belongingness: Once the physiological and safety needs have been achieved, the next level of human need is social that involves feelings of love and belongingness. As per Maslow, there is a need for interpersonal relationships that motivate behaviour.

Esteem: Maslow has classified esteem needs into two parts, one being esteem for oneself like achievements, dignity, independence, etc., and other being the desire for respect from others that includes status, prestige, etc. Maslow has clearly indicated that the need for respect or reputation is most important for children and adolescents and it lies ahead of real self-esteem.

Self-Actualization: A person attains self-actualization when he or she realises his or her personal potential, self-fulfilment, personal growth, etc. Maslow explained self-actualization as “a desire to become everything that one is capable of becoming”.

Segregation Of Needs

  

Further, Maslow has grouped needs into three major groups, viz. basic needs, psychological needs and self-fulfilment needs. So, unless you have basic needs covered you may not get the benefit of psychological needs and self-fulfilment needs.

Needs and Financial Planning

Financial planning is a process wherein your financial situations are analysed, your financial goals are listed down, and then a roadmap is created to achieve your financial goals. However, it is important to understand that financial planning is not just limited to financial goals or numerical activity. In fact, financial goals come later. At first cash flows are

streamlined, then your networth is assessed following which your emergency fund is planned and then your risk is managed with the help of life and non-life insurances. Finally, it is about your financial goals.

Steps in Financial Planning



Now the question is that why at all needs matter in the process of financial planning? As we have seen above in the steps of financial planning, the first step is streamlining cash flows. In this step, the cash flows have two major parts, one being income (inflow) and other being expenses (outflow). Further the expenses have sub-parts, viz. fixed expenses and discretionary expenses. So, here fixed expenses are your needs and discretionary expenses are those that are your wants. Fixed expenses may comprise expenses related to food, clothing, shelter, education, medical, etc. On the other hand, discretionary expenses comprise expenses like watching movies in a theatre, dining out, picnic or vacation, etc.

So, in the first step of financial planning you identify what are your expenses that are your needs and which expenses are your wants. Emergency fund planning itself is a need. An emergency fund is planned to help you in a situation of income loss. Irrespective of whether you have income or not, you need to fulfil your fixed expenses. Even risk planning with the help of insurance is a need. This is because in case of any unexpected event such as death of sole earning member, insurance definitely helps a family financially. In financial goal planning as well, the goals are divided between your needs and wants and those that are your needs are prioritized over wants.

Financial goals like child’s education, your retirement, medical corpus, etc. are your needs and you may not be able to defer these things to any future date. Even your succession planning or estate planning is also a need as this helps you to distribute your assets in a manner you desire and decide. This also helps to reduce any confusion and conflict among your legal heirs. So, as we can see, accounting for needs does matter even while undertaking the task of financial planning.



Matching Maslow's Theory to Financial Planning

Now you might be thinking how we can relate Maslow’s Need Hierarchy Theory with financial planning? Let’s find out.

Basic Needs : In basic needs we have two major needs, one being psychological needs like regular income, food, shelter water, etc. and the other being safety needs like security. For basic needs we need to streamline the cash flows in such a way that your psychological needs get fulfilled. Also, we need to make provision for emergencies by planning an emergency fund. This would take care of your psychological needs in case of temporary loss of income. To fulfil the safety needs we need to have insurances in place. In case of any uncertainty arising due to various life or non-life factors, insurances would help you to sustain financially. In case of your uncertain death, it would be difficult to recover from emotional loss. However, having a life insurance policy would help your family to sustain financially even in your absence. Even health insurance that includes critical illness and personal accident insurance creates a financial safety net to help you in case of any such emergencies.

Psychological Needs : When it comes to psychological needs there are two major needs viz. belonging and love needs and esteem needs. Belonging and love needs are something which cannot be bought with money. This is something that depends on your behaviour, your values, your beliefs, etc. So, this is something which cannot be attained from financial planning. However, people try to fulfil their needs with the help of money as they think that carrying premium products help them to increase their status in society. This makes them include financial goals like having a farmhouse, buying a BMW car, etc. So, though these get included in financial planning, being discretionary in nature they are prioritized below basic needs and financial goals like child’s education, retirement sustenance, etc.

Self-Fulfilment Needs : Self-fulfilment needs are those when one desires to achieve his or her maximum potential. Here people may try to attain complete financial freedom. Financial freedom can be achieved with the help of financial planning. One can achieve financial freedom when all his or her basic needs, including child’s education, retirement, etc.,are completely provisioned for. Financial freedom is something wherein you can experience no financial dependency required even to fulfil your luxurious desires.

Apart from this there are many financial planners around the globe who have further converted Maslow’s theory to relate it to personal finance.

About Abraham Maslow

Abraham Harold Maslow (April 1, 1908 – June 8, 1970) was an American psychologist who was best known for creating Maslow’s Hierarchy of Needs, a theory of psychological health predicated on fulfilling innate human needs in priority, culminating in self-actualization. He was a psychology professor at Alliant International University, Brandeis University, Brooklyn College, New School for Social Research, and Columbia University. He stressed the importance of focusing on the positive qualities in people, as opposed to treating them as a “bag of symptoms”. A ‘Review of General Psychology’ survey, published in 2002, ranked Maslow as the tenth most cited psychologist of the 20thcentury.

Born and raised in Brooklyn, New York, Maslow was the oldest of seven children. His parents were first generation Jewish immigrants from Kiev, then part of the Russian Empire (now Ukraine), who fled from Czarist persecution in the early 20th century. They had decided to live in New York City and in a multi-ethnic, working-class neighbourhood. His parents were poor and not intellectually focused, but they valued education. He had various encounters with anti-Semitic gangs who would chase and throw rocks at him. Maslow and other young people with his background were struggling to overcome such acts of racism and ethnic prejudice in the attempt to establish an idealistic world based on widespread education and economic justice. The tension outside his home was also felt within it, as he rarely got along with his mother, and eventually developed a strong revulsion towards her.

He is quoted as saying, “What I had reacted to was not only her physical appearance, but also her values and world view, her stinginess, her total selfishness, her lack of love for anyone else in the world – even her own husband and children – her narcissism, her Negro prejudice, her exploitation of everyone, her assumption that anyone was wrong who disagreed with her, her lack of friends, her sloppiness and dirtiness.” Maslow grew up in libraries and among books. It was here that he developed his love for reading and learning. He went to Boys High School, one of the top high schools in Brooklyn. Here, he served as the officer to many academic clubs, and became editor of the ‘Latin Magazine’. While jogging, Maslow suffered a severe heart attack and died on June 8, 1970, at the age of 62 in Menlo Park, California.



Conclusion

In financial planning needs gets higher priority than wants. This is for the obvious reason that needs are something that you cannot defer to any future date and you need them for survival.

So, while creating a financial plan, needs gets more importance over wants. Even Maslow has divided the needs into various categories based on various psychological triggers. Apart from belonging and love needs, all other needs can be fulfilled with proper prioritization and financial planning.