Many Americans start the New Year by resolving to improve their lives by exercising more, losing weight or making other changes. Based on research findings, one in five should resolve to put their financial house in order.
Research by Mass Mutual shows that many Americans struggle with their personal finances, especially when it comes to making the most of their employee benefits:
- 22 percent of Americans admit they don’t understand their personal finances
- 22 percent don’t know which employee benefits such as healthcare coverage, life or disability insurance or retirement savings should be a priority
- 42 percent say they don’t know if they are on track to retire comfortably
- 64 percent don’t know the details of their life insurance
Many people muddle through personal financial decisions and simply hope for the best. Unfortunately, all too often people make the wrong choices and risk leaving themselves unprepared for life’s financial realities. Making the right choices can lead to greater peace of mind.
Financial planning is a discipline built on a hierarchy of needs. Psychologist Abraham Maslow first introduced the hierarchy in the form of a pyramid to explain human behavior, starting with basic needs such as food and shelter at the bottom or foundation. Other needs build from there, in order of priority, including safety, social connections, self-esteem and, at the top of the pyramid, growth.
According to Maslow’s theory, basic needs must be satisfied before higher needs can be addressed. Food, water and shelter take priority over other needs such as whether or not your car has heated seats or a sun roof.
The hierarchy of needs works well when establishing financial priorities and making financial decisions. The layers of the pyramid can be matched to financial planning choices and even benefits selections:
Be Safe
The foundation of the pyramid is safety. Most people and their families need financial protection from dying prematurely, suffering a long-term or even a short-term disability, or becoming seriously ill. That means most people should prioritize signing up for healthcare coverage, life and disability insurance.
Build Savings
Once financial protection is in place, many of us should address shorter-term goals such as accumulating personal savings, building up cash for emergencies, and eliminating short-term debts such as credit card balances and car loans. Purchasing critical illness coverage can help protect savings, potentially avoid future debts, or provide a financial cushion in the event you or someone in your family suffers a serious illness or injury.
Plan for Retirement
Next, most of us need to plan for the future, which means building wealth and reducing debt over the long term. Saving for retirement through an employer’s 401(k) or other retirement savings program is a good long-term priority. Other long-term goals should be saving for college if you have children and eliminating mortgage debt.
Pursue Dreams
Those who accomplish those goals and who are fortunate enough to have additional financial resources can then consider their financial dreams that fall into the esteem and growth categories. Travel, pursuing expensive hobbies, purchasing a vacation home and other goals should be pursued only after other needs are met.
We all have important financial needs, wants and dreams. The key is to understand the difference and to take care of your most basic protection needs first. Your employer’s benefit package should be a place to start. (BPT)
