The pyramid of financial needs

The pyramid of financial needs

Perhaps you know the pyramid of Maslow's needs. In the 1940s, the American psychologist Abraham Maslow developed his theory of human motivation ( A Theory of Human Motivation ) in which he describes a hierarchy of human needs. Maslow presents in his theory five groups of needs.

 

Survive

cash

The first level of the pyramid of financial needs is survival. As for air and food, this level is essential. The first concept to understand is the relation to money. If you think that the government will support you, that others will pay for you or that you will win the lottery, you do not have a good relationship with the money. You must take your life in hand and work to improve your lot for yourself.

Once you have a good relationship with money, the next step is to make sure you spend less than you earn. This may seem simple in theory but in practice it is sometimes more complicated. To get there, you have to make a good budget and respect it. Without that, nothing is possible.

Pay your debts

Pay your debts

Once the budget is balanced, the priority is to pay off debts. Before investing your money, it is better to pay your debts (especially those with high interest rates such as credit cards). It is also a good idea to cut your credit cards and no longer take new credit. If you do not deal with your debts, they may grow over time.

If you are unable to repay your debts with your budget, you are in a position of insolvency. In this case, you should consider one of these solutions to get you out of debt.

Learn

Once you have balanced your budget and settled your debts, we can move on to the next level. Here, we want to build a contingency fund of a few thousand dollars for contingencies (auto repair, breakage, accident, etc.). In this way, if bad luck occurs, you will not need to fall back into debt.

Then, it's about learning more about personal finances. Read financial blogs, books, magazines, etc. to develop your knowledge. In addition, explore topics such as tax-sheltered savings (RRSPs and TFSAs), savings programs offered by your employer, and high-interest savings accounts. Set specific financial goals and work towards them.

Invest

money

Now put your knowledge to the exercise! Place your money in the previously identified financial products. Invest according to your tax situation, your risk tolerance and your investment horizon.

Optimize

Once you start saving and your goals have been set, you can now become more sophisticated. When you have amassed a nice sum, you will want to look at more sophisticated tax issues and diversify your assets. For example, study the question of your inheritance well; you would not want to leave your beneficiaries with a salted bill.

At this level, you should also keep an eye on any legislative changes that might benefit or hurt you. Consult professionals who will advise you on different plans, according to their expertise.

Free

Free

Once you reach this level, you should be in a very good financial position. Your investments should generate enough income for you to be financially independent. Keep optimizing your investments and keep up to date on the best opportunities. At this level, you should also have enough free time to devote to your passions, family, and friends. You are at the top of the pyramid of financial needs!

Leave a Reply

Your email address will not be published. Required fields are marked *