This article is written on the eve of the Freedom Day which would have been commemorated on 27th April. For many South Africans, Freedom Day brings back memories of the euphoria of 1994, when Black, Indian and mixed-race voters stood in long meandering lines to cast their first ballots.
Today, I am reminded of the Maslow’s hierarchy of needs. This is a motivational theory in psychology comprising of a five-tiered model of human needs, beginning with the most basic one of survival, physiological needs, safety, love, esteem, and self actualisation.
I would like to adopt this theory to argue that financial freedom is the pathway to inner and outer happiness. The power to discover that pathway is within you. But first you must know where you want that path to take you. You must know what your goals are and in what direction you want that path to take you.
You need to ensure that your priorities are in order and that the basics are covered. Take time to reflect on the following questions:
- What do I want my ultimate financial destiny to be?
- What do I want from my money today, as well as years from now?
- What do I need to do to make my life worthwhile?
- Do I understand the difference between a need and a want?
Achieving financial emancipation requires in-depth knowledge of one’s various aspects of their finances. A savvy approach is to link Maslow’s theory to the hierarchy of financial needs covering areas such as income, insurance, credit, savings, and investments. These must be analysed and achieved in this particular order. For example, it does not make sense to spend your energy and money acquiring investments when your basic income and expenditure profile is unstable.
So, let us tackle each hierarchical level that could lead to sound financial emancipation.
- Income – The most basic financial need is income to cover basic living expenses such as food, housing, maintenance etc.
- Insurance – To protect your hard-earned income, you must ensure against unforeseen events that create setbacks. Your assets also need to be protected.
- Credit – To acquire assets such as car, home, or education (a form of a study loan) you may need a healthy credit score. It is suggested that one takes a reasonable and responsible credit to acquire long-term and tangible assets.
- Savings – When you save, you put away resources for a specific goal. When you choose to save, you are giving up the least important expenses in your life right now to have a sense of achievement and respect in the future.
- Investments – Through investing, you can attain important life goals such as achieving financial security for your family and your dignity.
The overarching objective of following the priorities suggested in this article, is to ensure a sound legacy for the current and generations that follow soon after one passes on. The model is simple and provides clarity regarding what people need to do to realise their true financial emancipation. It is a responsible process that requires accountability towards those you love, it provides an opportunity of being respectful of yourself and your money.
At the Financial Planning Institute, we recommend a simple model; the FPI MYMONEY123™, which suggests that to achieve financial freedom, the first step is to understand budgeting, followed by dealing with debt and finally tackling savings and investments.
Written by Sydney Sekese, CFP® professional and member of the Financial Planning Institute