Eminent psychologist Abraham Maslow's hierarchy of needs theory suggests the most basic level of needs must be met before an individual will strongly desire or focus on secondary or higher level needs.
It certainly seems like common sense for a person to first meet their need for food and shelter before they focus on education. But when people focus on financial goals, they need to balance both short-term needs and long-term objectives.
This challenge can be best illustrated by employee participation in company 401(k) plans. When people are early in their careers, they may have a car loan with higher auto premiums, health insurance, school loans and other basic expenses.
Maslow's hierarchy of needs theory describes the pattern that human motivations generally move through. It is often portrayed in a pyramid shape with the largest, most fundamental levels of needs at the bottom and the need for self-actualization at the top. Graphic: DepositPhotos
With their income at their lowest earning point, it’s difficult to find discretionary dollars to save in the 401(k) plan. Without contributing to their plan, they may lose out on the employer match.
After they have been working a few years, they may find they want to purchase a home and need to save for a down payment. They may even be stretched to make the mortgage payments. And later on, they may focus on saving for educational expenses, if they have children.
If we accept Maslow’s thesis, it means people will first focus on their immediate financial needs, and then move on to the next financial goal after the first needs are met.
The problem with the approach is that people will not have much time to save for retirement, if they’re getting married and starting families later in life. But by saving for retirement earlier, they can accumulate enough funds for an adequate standard of living.
But most 25-year-olds are not thinking about their needs in 40 years—although they probably realize that Social Security won’t be enough to meet their needs. So how do advisors combat the tendency for their clients to follow Maslow’s needs?
One way is to reiterate that working toward a long-term goal can provide current satisfaction. Constructing a financial plan that has benchmarks allows people to monitor their progress and keeps their objectives front and center.
This is a concept similar to selling life insurance. Reminding clients that they have adequate life insurance protection is in the same vein of conveying a current benefit that leads to satisfaction.
Meanwhile, Maslow’s hierarchy of needs also relates to motivating agents. Most agents will generate commissions up to their financial requirements. Motivating them to exceed that income need may require other incentives such as sales recognition, agency ownership or other incentives.
And, if that doesn’t work, agency principals can always try one of Maslow’s other levels of needs: belonging.
Dave Evans is a certified financial planner and an IA l-h contributing editor.