If you’ve ever taken a psychology course you may be familiar with Abraham Maslow’s Hierarchy of Needs. In ascending order, the needs are:
- Social / Belonging
- Esteem / Achievement
- Self-Actualization / Reaching your potential
The theory states that people need to fulfill their basic needs before devoting energy to the higher levels. So, for example, you can’t focus on your job (safety) if you are hungry or haven’t had enough sleep, and you can’t focus on friendships or reaching your potential if you are about to lose your job.
The hierarchy of needs is simply a way of setting priorities in your life.
Hierarchy of Financial Needs
We can also apply a similar concept to prioritizing our financial needs. Although every individual faces their own unique circumstances, the model is applicable to all demographic groups – whether you are starting your first full-time job, or finally handing in your nametag after a long career.
When you’re thinking of your finances your first consideration shouldn’t be how to invest your money when you are having trouble paying your bills.
The first step is to know what, how, and in what order things need to be done. Begin at the bottom of the priority pyramid and work your way up.
Level 1 – Basic Necessities
First you need to construct a solid base. We need to fulfill our basic needs before we can move on to the next level. The most basic financial need is income to cover your necessary living expenses of food, shelter, and clothing.
This level is also where wants can masquerade as needs.
I’m not suggesting living in a shack and eating a steady diet of canned beans in order to cut expenses before you can move on. But, you know you generally buy more than what you currently need, whether it’s every number of iPhone to get a smaller/bigger screen or a few more pixels, to buying a 5000-square foot home for two people to rattle around in.
I know it’s cool to brag about all the options and gadgets in your new auto or kitchen appliance, but I’ll bet in the long run you don’t use the majority of them, or even bother to read the instruction manual to see how to use them.
Level 2 – Security and Safety
Life is full of uncertainties. Always have a fall-back in case of unexpected events that can create setbacks.
Once you have your basics under control you need to protect your earnings with life and disability insurance. Protect your assets with auto and home insurance.
Invest in your career to secure your future employment.
An emergency fund also fits into this level as well as will and estate planning.
Retired people need a safe pool of money to draw on for a few years in case of a stock market downturn.
Level 3 – Accumulating Assets
Once you have protection, it’s time to grow your wealth.
To acquire some assets like real estate, you may need to leverage credit to acquire the necessary capital. Paying off debt is a form of savings, too. The best return on your money is paying off credit card debt. This will always boost your bottom line.
Invest for future returns to attain important life goals such as future financial security.
This is also the time to plan for your retirement. Remember, the money you save now will be spent by the future you.
Level 4 – Enhancing Your Life
Save for specific goals that will enable you to do the things that bring joy into your life like enjoying family activities and entertaining friends.
We all need a few luxuries. It could be anything from travel or buying a vacation home to enjoying hobbies and drinking fine wine.
Level 5 – Financial Independence
Financial independence means you are able to live on income from pensions, investments or passive income such as dividends, royalties and rental income. It often refers to the retirement years, but it can also mean the freedom to work how, when and where you like. It means not having to worry about money.
Level 6 – Leaving a Legacy
Okay, I added a level. You leave a legacy by making a difference in someone else’s life. Make charitable donations to a cause you believe in. Help your children or grandchildren with their education expenses or start a business.
In much the same way you master each level in your favourite video game before moving on to the next, prioritize your financial decisions in order.
The bottom three rungs in the hierarchy of financial needs make up your foundation. Once they are in place you can move on up to achievement and your full potential.
Pay yourself first. It’s one of the core tenets of personal finance. Treat your savings like an obligation – your number one priority, in fact – and you can spend what’s left in your bank account guilt-free.
I’m a bit of a misfit when it comes to saving money. I don’t actually pay myself first (gasp!) but before you take away my personal finance blogging card allow me to explain how I still meet my savings goals.
Budgeting for those spend-y months
The pay yourself first, spend the rest approach sort of implies that every month is the same. Your paycheque enters your account, you set-up automatic transfers into various savings vehicles, and then spend the rest of your money on rent, groceries, gas, and whatever else life throws at you.
I don’t know about your household expenses, but ours can vary widely from month-to-month. In our biggest spending category, which I call ‘Daily Living’, we spent $1,685 last May on things like groceries, restaurants, clothing, and other miscellaneous spending. Last July, that category jumped nearly double to $3,200.
That’s why instead of letting my bank account balance dictate how much I save and spend each month, I use a 12-month spreadsheet to plot out our entire financial picture for the year.
The key to this approach is to plug your savings goals into every month and also highlight any irregular expenses that come up throughout the year (like all the food and wine we consume in July, apparently).
Don’t let an expensive summer derail your budget
That brings me to summer. For our family, it’s the best and also the most expensive two months of the year. And it’s not just the patio wines and sizzling steaks that break the budget. Summer camps for the kids, concerts, road-trips, it all adds up.
Heck, even our favourite TV show – Game of Thrones – moves to July this year, which means coughing up $40 to order HBO for two months.
Simply put, it’s easy to see how without a proper spending plan the high cost of summer can quickly derail our budget. I refuse to let that happen, so that’s why I budget meticulously to avoid dipping into our savings in July and August.
Budget for savings, too
So, although I don’t technically pay myself first I still manage to survive the expensive summer months without breaking the budget. Indeed, we’ll sock away more than one-third of our income this year.
Part of our savings includes an emergency fund because, well, stuff happens. Like when our hot-water tank stopped working the day before we left on summer vacation. That was a $350 service call I’d like to have back, thank you very much.
No doubt you can save more money faster when you earn a higher interest rate on your savings. Since EQ Bank came on the scene last year they’ve offered market-leading interest rates on an account with no fees and no minimum balance.
Currently, the EQ Bank Savings Plus Account pays 2.3 percent interest on savings deposits. And, unlike other online banks, this rate isn’t just for some deposits or only for some customers; it’s the everyday rate for all EQ Bank customers.
That’s important because for a year-round saver like me it’s nice to earn a high interest rate all the time, not just during ‘savings account promotional season’.
The nice thing about EQ Bank – besides the high everyday interest rate – is that its Savings Plus Account also comes with some chequing account functionality; offering unlimited day-to-day transactions, the ability to pay bills for free, and you also get up to five Interac e-Transfers for free each month. You can also transfer money easily (and for free) between EQ Bank accounts and to your linked accounts at other banks via electronic funds transfer (EFT).
Deposits in the EQ Bank Savings Plus Account are insured up to the applicable limits ($100,000).
I feel good about my spend-y summer knowing that I can still meet my savings goals and not have to dip into my savings account to go camping or to buy steak & beer for the weekend BBQ.
Bonus offer for Boomer & Echo readers
As a special treat for my readers to get your summer savings started, new accounts opened have the chance to win one of 10 $150 deposits into your new savings account! That’s a great way to kick-off your summer!