Budgeting by Hierarchy of Needs

In order to have money to invest, you need to think about what’s coming in and going out. This is an area most people hate to think about. But it’s key to developing good financial habits that will give you freedom over time.

Money can align with what we value. Abraham Maslow created a famous hierarchy of needs that you may recall from your college psychology class days. He wrote a paper in 1943 entitled A Theory of Human Motivation that described a five-stage model that builds level-upon-level in this sequence of needs: physiological, security, love/belonging, esteem and self-actualization.

We can use the Maslow model to help us reconsider how we choose to spend our money. Of course we need to make sure our basic physiological and security needs are met. But all of us also need to allocate some of our hard-earned cash to the higher levels of the hierarchy too.

The Financial Hierarchy of Needs

What we’re really talking about here is budgeting. And you can take a look at any number of credit counseling services or financial guidelines that set parameters how much money is prudent to spend on various financial needs. But none of them address how those categories relate to our human needs.

The pyramid below shows a model that fuses our needs as human beings with a common sense approach to how we allocate our money:


Let’s take a look at how you might categorize typical expenses across Maslow’s five levels of basic human needs:


The most basic needs are food, water, sleep, shelter, health care and so forth. These are the typical “needs” when you start thinking about budgeting. Needs can span several of these categories.


Next on the ladder of needs is security. Within the budgeting process, this starts with building up an emergency fund to cover at least three months (and hopefully a year) of expenses. That provides security should you encounter an unexpected large expense or if you lose your job.

Security also includes a regular savings program where you aim to bank at least 10% of your net income (gross income less income tax). If you’ve amassed debt, monthly debt payments will fit into this category. Many people will also want to include basic types of insurance to provide security for themselves and their families. Communication can also bring security—whether that’s by cell phone, internet or other means.


Love and belonging can mean many things. Providing care and comfort for those you love. Finding a sense of community. On the budgeting spectrum, now we move into “wants” that are more discretionary than basic “needs” in life.


People need to feel a sense of well-being. It’s human nature to try to learn through education to create a better life for yourself and your family. Self-care adds to esteem. When we feel better, we can do more with our lives.


This final level is where we express ourselves as human beings. That may be through giving our time and money to others through charity or in self-development that stretches our potential. These activities can be anything that elevates the human spirit. When budgeting, we tend to think of these expenses as “wishes.”

Hierarchy of Needs Budgeting

As you might imagine, when you have less money, more of it will probably go toward the first levels of the hierarchy. With more money, the proportion spent on basic needs will probably be less. But people of all levels of wealth have the same needs and should make sure they allocate some money to each area.

See if you can analyze where your money is going by hierarchy of needs. We’ll let you be the judge of where you would put those expenses in the hierarchy pyramid.

Once you’ve completed this exercise, ask yourself some questions.

  • Are you surprised about where your money is going?
  • Are you happy with the allocation of your money across your hierarchy of needs? Do you want to make some changes?
  • What are the top three things you can do right away to feel better about how you are spending your money?

The point of this exercise is to reflect on what is important and meaningful to you and then to analyze how your money is spent. From there you can make choices about how you choose to direct your funds.

Make sure you are saving—that’s the key to future success. If you can’t save 10% of net income right away, start with a level you can commit to and increase it by 1% or more every chance you get.

Find ways to inspire yourself as you take control of how to use your money. You can’t control what happens in the stock market or what you pay in tax, but you can control what you spend. Using this type of model lets you allocate your money thoughtfully to needs, wants and wishes.

Traditional Budget Template

I’ve given you a way of thinking about budgeting through Maslow’s hierarchy of needs. But some of you will benefit from seeing a more traditional type of budget using different spending categories. It’s all about balancing inflows and outflows.

The “B” Word: Budget

Think of it as how to allocate your resources. Cash flow allocation (a much friendlier term for the “B” word) is often glossed over, but it’s critical to your financial success. Holding yourself accountable to how you choose to spend your money takes time and effort. But the process can be very revealing.

No matter how sophisticated you are with your money, tracking your spending is a valuable exercise. As you earn more over time, it doesn’t seem like you’re indulging through your spending. But it has a way of creeping up on you.

Sometimes people ask for guidance about what’s “normal” for spending by category. That really varies by income level and personal preference. But I’ll try to give you some guidelines:

  • Save First. Start by looking at what is coming in every month. Take out what you’ll owe for taxes (net income). Try to save at least 10% of net income. If you’re not in your 20s anymore, that savings number will probably need to be upwards of 15%.
  • Company Match. If you have the opportunity to save through work, take advantage of it—especially if your company matches your savings. This money grows pre-tax and can make a huge difference over time. Your goal is to max out on what you’re allowed to save. But almost no one can start there. So do what you can when you start and vow to increase that percentage every time you get a raise or bonus.
  • Reasonable Debt. Don’t take on more debt than you can comfortably afford. You may find that you have to change how you are living to find a level of debt that is reasonable for your situation. Sometimes we think we know what we want, but not everyone needs the big house and fancy car. If you’ve accumulated too much debt, figure out which debts have the highest interest rates. Pay those down faster and make them a higher priority.
  • Retirement Savings. If you are raising a family, don’t neglect your own retirement savings. Yes, you’ll feel better if you put away something for your kids’ education, but you still need to put something away for retirement so you get the time value of compounding on those dollars.
  • Prioritize. Going through the exercise of categorizing expenses by needs, wants and wishes is valuable. If you find you need to cut something due to unexpected circumstances, you’ll know to look at those wishes first. But from a psychological perspective, you should still make sure you are allocating some money to all levels of the hierarchy of needs (see previous section).

There is freedom in defining where you want your money to go. If you notice frustration or depression around money issues, question your most basic assumptions. Maybe you don’t need to own a house. Maybe the kids don’t need quite as many after-school programs. Maybe you could live somewhere else with a lower cost of living.

One of the best times to look at your spending is early in the year—perhaps while you’re preparing your tax return and are going through your records. Most people can find what they spend by looking at their bank statements and credit card statements. Group costs by category so you get a good idea of where your money is going.

Make sure you put savings goals at the top of the list of where your money goes. This is really the only way of getting ahead. You should aim to save at least 10% of net income (more if you can). Make an emergency fund a top goal. Once that’s in place, prioritize the rest of your goals and make steady progress toward them month-by-month, year-by-year.

Spending Worksheet

Download the Spending Worksheet as a PDF »

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