Widely read:
When Abraham Maslow, the famous American psychologist, developed the model about the hierarchy of needs, did he know that there could also be a hierarchy of investments? For every human need that there is, one needs some money. How much money is needed in how much time, and for how long, becomes the key question then. Let us see if we can also create an investment hierarchy that addresses these needs.
Let us understand this diagram in the context of investments.
| Need type | Some examples | Relevant hierarchy of investments |
|---|---|---|
| Physiological needs(The most basic needs) | Food, water, clothing, shelter, rest, overall health, and reproduction. |
|
| Safety needs | Protection from violence and theft. Emotional well-being and stability. Health and financial security. |
|
| Belongingness and love needs(The last of the lower needs) | Friendships and family bonds. Physical and emotional intimacy. Participation in society. |
|
| Esteem needs(Ego-driven needs) | Awards, honours, fame, rewards and recognition, holding records, career advancement, cultural respect. |
|
| Self-actualisation (Growth needs, highest on Maslow's pyramid, and are about unlocking your full potential) | Education, skill development, hobbies, refining of extracurricular talents, caring for others, and broader goals like learning new things and languages, travel, rewards and recognition. |
|
The psychology behind it
It is important to note that Maslow classified the first four needs as 'deficiency needs' and the self-actualisation as 'growth needs' .
This means that the first four needs must be met in order to survive, while the last set of needs is more about pleasant experiences rather than avoiding pain. So, in the priority order, self-actualisation needs are the last. In an oversimplification, one could also say that these needs are actually wants.
Your financial pyramid
As the timeless advice goes, needs must be fulfilled before wants, and if a hierarchy of investments were to be created with these things in mind, it might have only four levels and look something like this.
Key takeaways
-
The first thing to accept is that this is not a cookie-cut solution. Different investors are in different places, as far as Maslow's hierarchy goes. And accordingly, their place in the investment hierarchy will also change.
-
The second thing is to keep a long-term vision. Once your basic contingency fund (which is at least six months' worth of your expenses) and your insurance are in place, your major deficiency needs are taken care of.
-
All growth needs, whether short-term or long-term, are basically wants, and securing your deficiency needs post-retirement. For them,
mutual funds
are the best option.
-
Your short-term needs are best addressed by short-term funds, while your long-term needs are best addressed by an equity fund.
- If you're a new investor, you might want to begin with an aggressive-hybrid fund , graduate to a good flexi-cap fund or multi-cap fund, and diversify and declutter as you grow.
The key is to think and plan holistically, and with just five or six kinds of investments in total, you can actually aspire to be in one of the top levels of the hierarchy of needs, as well as that of investments.
Also read: Chanakya's lessons for financial success
This article was originally published on September 11, 2023.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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