What Maslow’s Hierarchy Can Teach You About Wealth & Goal Setting
Excerpt adapted from the Book:
The Aspirational Investor by Ashvin B. Chhabra
Your goals and aspirations seem so personal, and perhaps so idiosyncratic, that they may defy any attempt to create a general frame- work that would logically organize them, let alone build a wealth management strategy to achieve them. But the work of one of the stars of academic psychology, Abraham Maslow, helps point the way.
In the early 1950s, Maslow was pioneering a new approach to the study of human behavior. Instead of focusing on the mentally ill, as was the convention at the time, he studied “exemplary people”—the top 1 percent of achievers in various fields, such as contemporaries Albert Einstein and Eleanor Roosevelt. Maslow’s groundbreaking work, the basis of what is today called humanistic psychology, includes a breakdown of the psychological underpinnings of human aspirations. These are often illustrated in a famous pyramid known as Maslow’s hierarchy of needs.
Maslow’s pyramid spans five categories that can be boiled down to three essentials: the need for food, shelter, and safety, that is, basic requirements for survival; the need for family, friendship, and intimacy, which creates a sense of belonging, love, and acceptance; and, at the top of the pyramid, a need for self-esteem and “self- actualization,” defined as the ability to pursue your interests, which may include charity and service to others. As Maslow succinctly put it, “What a man can be, he must be.”
At first glance, Maslow’s hierarchy of needs may seem unrelated to the discipline of investing. But if you define risk as the failure to meet your needs (or goals), then the hierarchy of needs provides an elegantly straightforward way to think about how to order those goals and the consequences of falling short. Using Maslow’s framework as inspiration, every investor can categorize and prioritize goals, as follows:
Essential Goals
Safety and shelter: the certainty of protection from anxiety or poverty. Risks include loss of employment, health issues, loss of life (as a risk to other family members), accidents, and so on.
In order to meet your essential goals, you must construct a safety net that protects you from the variety of risks listed above, including extreme market volatility. In other words, you must achieve a certain level of safety.
Important Goals
Thriving within a peer group: this enables and facilitates the process of nurturing and supporting those who are important to you, including a spouse, your family, and peers.
In order to meet your important goals, you must achieve a high probability of maintaining your current standard of living. In other words, you must achieve stability.
Aspirational Goals
A way to pursue your dreams and aspirations, including further education, starting or expanding a business, philanthropic giving, or other aspirational goals like travel.
In order to meet your aspirational goals, you may have to allocate capital to projects that may be viewed as uneconomical or to investments that, in adverse circumstances, may result in catastrophic losses. Your pursuit of aspirational goals must therefore be sized appropriately to recognize the possibility that the capital invested in such idiosyncratic endeavors may be completely lost.
Organizing & Prioritizing Goals
The way to get a handle on your goals, then, is to make a list; categorize them as essential, important, and aspirational; and quantify the cost by deconstructing each one into a series of cash flows. Saving for retirement isn’t your only goal, of course. Other financial goals include saving for a child’s college education, buying a new car, purchasing or maintaining a vacation home, or starting a business.
Different people will categorize the same types of goals in different categories. This prioritization depends on a variety of factors, such as your age, how much money you have relative to your needs, and the simple fact that one person’s essentials may be another individual’s aspirations.
A parting thought…
Finally, while Maslow’s hierarchy of needs is often depicted as a pyramid, that can be misleading. Essential goals must come first in terms of resource allocation, but in practice, people tend to pursue all their goals simultaneously. Aspirational goals, in particular, can be just as psychologically important as the others.