One of the coolest things I’ve run across recently in the world of personal finance is a recent post from Mister Squirrel. This post takes the well-known Maslow’s hierarchy of needs and adapts it to personal finance.
Since I’m married to a guy with a Ph.D. in Psychology, I’ve known about Maslow’s hierarchy for quite some time. According to the hierarchy (which not everyone agrees with), you need to have a solid basis to build on if you want to reach self-actualization, a state in which you realize your potential, and you have the ability to enjoy the things most important to you, and express in a manner that fulfills you.
The idea is expressed in a pyramid, and the bottom two levels, the bases, involve mastering your physiological and survival requirements, as well as having a degree of safety and stability. Before you can progress as a person, the idea is that you need to be able to take care of your basic needs for your body need to be taken care of.
Mister Squirrel takes this concept and turns it into a pyramid of financial progress. If you want to enjoy your money, and live the way you want (reaching the self-actualization stage of your finance), you can learn from Mister Squirrel’s hierarchy:
Change Your Mindset
One of the things I liked best about this hierarchy of financial needs is that the base starts out with your mindset. In order to “climb the pyramid,” you need to have the “right” attitude about money. This includes having a healthy attitude about money, as well as arranging your finances so that your expenses are less than your income. Before you can do anything else, you need to change your outlook on money. From looking at earning more vs. cutting back, to making sure that you aren’t spending on things that are unimportant, your approach to money needs to be healthy before you can make any progress at all.
So, get your priorities straight, stop spending more than you earn, and figure out how to use money as a tool, rather than seeing money as an end itself. Once you’ve done that, you have a solid foundation to support your pyramid and move higher.
Financially Sound Practices
Once you’ve got your attitude sorted, it’s time to engage in a number of financially sound practices. Mister Squirrel takes you up the pyramid in a way that makes sense. From getting rid of expensive debt, and avoiding debt in the future, to building your emergency fund and learning about how money works, to investing your money wisely, there are a number of actions you can take as you climb the pyramid. The ultimate goal, according to this hierarchy, is get to the point where you have passive income that covers your expenses, freeing you up to live the life you want.
Even if you aren’t completely passive with your income, the idea of having the financial freedom to pursue your desired lifestyle is a good goal to have, and it represents the pinnacle of the pyramid. As you put together a plan for your finances, this pyramid can be a useful guide.
