Appraise Your Needs
Just as your values influence your financial decisions, so do your needs.
American psychologist Abraham Maslow proposed the Hierarchy of Human Needs. Essentially, your lowest and most basic needs must be satisfied before you can move toward satisfying the next level of needs. In Maslow’s hierarchy, physiological needs (food, water, sleep) must be satisfied before moving to safety needs (shelter, safety) and so on.
Using a similar approach to Maslow’s hierarchy, you can analyze your financial health on five levels of need (as proposed by MissionAssetFund.org):
- Income – Can you cover basics like food, housing and utilities?
- Insurance – Do you have adequate protection of your income, health and other assets (e.g., home, renters, disability, long-term care)?
- Credit – Can you borrow when you need to without paying high rates? Are you able to make your payments on time?
- Savings – Can you set aside money for emergency needs or big-ticket items? Can you manage if you experience a major change in your income? Are you saving for your retirement?
- Investments – Will you be able to cover your expenses when you retire? Are your current investments beating inflation?
Starting at the bottom of the pyramid, you need to meet your basic income needs before you can begin to address insurance needs, credit needs and so forth. Sometimes you will meet needs at a higher level without feeling totally secure at a lower level; when this happens, check in with lower levels, depending on how your life circumstances change, to make sure you have a strong foundation.
Adapted from MissionAssetFund.org's Hierarchy of Financial Needs