Markets in a Minute

Visualizing the Hierarchy of Financial Needs

Published

4 years ago

September 17, 2020

Dorothy Neufeld

This Markets in a Minute Chart is available as a poster.

Hierarchy of financial needs

This Markets in a Minute Chart is available as a poster.

Visualizing the Hierarchy of Financial Needs

Behavioral scientist Abraham Maslow wrote “A Theory of Human Motivation” in 1943, arguing that humans worldwide are influenced by a “hierarchy of needs”.

This theory organizes human needs across five levels, where needs in the lower end must be satisfied before progressing onto the next level. At one end are physiological needs such as sleep and shelter, while at the other end are esteem and self-actualization.

This Markets in a Minute chart from New York Life Investments explores how Maslow’s theory applies to our financial needs, pinning down the steps to creating a strong financial foundation.

The Essentials

What are the five levels in the hierarchy of financial needs?

Cash flow and basic needs:
Covering food, housing and daily expenses. Ensuring the fundamentals, including our physiological needs, are covered financially.
Financial safety:
This covers insurance and an emergency fund to help prepare for unforeseen events and risks. As a safety cushion, an emergency fund should cover three months of living expenses in case of an accident, an unexpected health or family issue, or losing a job.
Accumulating wealth:
This includes growing investments, paying down debt, and saving for retirement. At this level, the focus shifts to growing assets for long-term success and longevity.
Financial freedom:
Long-term care and children’s education are found within this category, along with retirement savings and vacations. These financial needs are linked with esteem needs, such as self-respect and personal accomplishment.
Legacy:
Estate planning, tax planning, and business succession planning all fall within this category, connecting with self-actualization in Maslow’s pyramid.

Naturally, financial needs can shift based on a given situation. But as a general rule of thumb, moving along this path can help create an enduring roadmap for financial heath.

Financial Needs Under the Microscope

While it’s easy enough to describe the theory in concept, how does the hierarchy of financial needs impact our day-to-day lives in practice?

To start, as individuals live longer, many are concerned with having enough savings for retirement—across all income levels. For Americans in the lower income bracket, 50% worry about their retirement savings, while 26% worry in upper income levels.

Worry about each of the following often	Lower Income	Middle Income	Upper Income
Being able to save enough for retirement	50%	37%	26%
Paying their bills	59%	35%	15%
The amount of debt they have	51%	35%	21%
The cost of health care for them and their family	47%	35%	18%
Take a pay cut due to reduced hours or demand for their work	51%	25%	18%
Losing their job	40%	21%	11%

Source: Pew Research Center, survey of U.S. adults conducted April 7-12, 2020

Debt is also a primary concern among many Americans, as the cost of both healthcare and education have continued to rise. Average annual college costs, for example, have risen 25% over the last decade, while U.S. household debt has roughly doubled to $14 trillion since 2004.

It’s only once these above needs are taken care of that individuals can focus on the top of the financial needs hierarchy, taking care of legacy-focused items such as estate and tax planning, or business succession planning.

The Importance of Wealth Management

To navigate the hierarchy of financial needs, the importance of having a robust financial plan comes into focus.

Especially during times of uncertainty, individuals need a framework that accounts for changing life circumstances, such as a new job or purchasing a house. And when individuals move up each rung of the financial needs pyramid, they must also recognize how their tactics might need to change to best pursue their financial goals.

Cultivating a stronger awareness of financial needs can help individuals make more informed choices, on both a micro and macro level—from day-to-day purchases to long-term investment decisions.

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Markets in a Minute

The Average American’s Financial Portfolio by Account Type

From retirement plans to bank accounts, we show the percentage of an American’s financial portfolio that is typically held in each account.

Published

3 months ago

September 11, 2024

Jenna Ross

The Average American’s Financial Portfolio by Account Type

Where does the average American put their money? From retirement plans to banks, the typical financial portfolio includes a variety of accounts.

In this graphic from Morningstar, we explore what percentage of a person’s money is typically held within each account.

Breaking Down a Typical Financial Portfolio

People put the most money in employer retirement plans, which make up nearly two-fifths of the average financial portfolio. Bank accounts, which include checking, savings, and CDs, hold the second-largest percentage of people’s money.

Account Type	% of Financial Portfolio
Employer retirement plan	38%
Bank account	23%
Brokerage/investment account	14%
Traditional IRA	10%
Roth IRA	7%
Crypto wallet/account	4%
Education savings account	3%
Other	1%

Source: Morningstar Voice of the Investor Report 2024, based on 1,261 U.S. respondents.

Outside of employer retirement plans and bank accounts, the average American keeps nearly 40% of their money in accounts that advisors typically help manage. For instance, people also hold a large portion of their assets in investment accounts and IRAs.

Account Insight for Advisors

Given the large focus on retirement accounts in financial portfolios, advisors can clearly communicate how they will help investors achieve their retirement goals. Notably, Americans say that funding retirement accounts is a top financial goal in the next three years (39% of people), second only to reducing debt (40%).

Americans also say that building an emergency fund is one of their financial goals (35%), which can be supported by the money they hold in bank accounts. However, it can be helpful for advisors to educate clients on the lower return potential of savings accounts and CDs. In comparison, advisors can highlight that investment or retirement accounts can hold assets with more potential for building wealth, like mutual funds or ETFs. With this knowledge in mind, clients will be better able to balance short-term and long-term financial goals.

The survey results also highlight the importance of advisors staying up to date on emerging trends and products. People hold 4% of their money in crypto accounts on average, and nearly a quarter of people said they hold crypto assets like bitcoin. Advisors who educate themselves on these assets can more effectively answer investors’ questions.

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Markets in a Minute

5 Factors Linked to Higher Investor Engagement

Engaged investors review their goals often and are more involved in decisions, but which factors are tied to higher investor engagement?

Published

3 months ago

August 22, 2024

Jenna Ross

Partial bar chart showing the factors linked to higher investor engagement along with a picture of a man looking at a cell phone.

5 Factors Linked to Higher Investor Engagement

Imagine two investors. One investor reviews their investment goals every quarter and actively makes decisions. The second investor hasn’t reviewed their goals in over a year and doesn’t take part in any investment decisions. Are there traits that the first, more involved investor would be more likely to have?

In this graphic from Morningstar, we explore five factors that are associated with high investor engagement.

Influences on Investor Engagement

Morningstar scores their Investor Engagement Index from a low of zero to a high of 100, which indicates full engagement. In their survey, they discovered five traits that are tied to higher average engagement levels among investors.

Factor	Investor Engagement Index Score (Max = 100)
Financial advisor relationship	Don’t work with financial advisor: 63
	Work with financial advisor: 70
Sustainability alignment	No actions/alignment: 63
	Some/full alignment: 74
Trust in AI	Low trust: 61
	High trust: 74
Risk tolerance	Conservative: 62
	Aggressive: 76
Comfort making investment decisions	Low comfort: 42
	High comfort: 76

Morningstar’s Investor Engagement Index is equally weighted based on retail investors’ responses to seven questions: feeling informed about composition and performance of investments, frequency of investment portfolio review, involvement in investment decision-making, understanding of investment concepts and financial markets, frequency of goals review, clarity of investment strategy aligning to long-term goals, and frequency of engagement in financial education activities.

On average, people who work with financial advisors, have sustainability alignment, trust AI, and have a high risk tolerance are more engaged.

The starkest contrast was that people with high comfort making investment decisions have engagement levels that are nearly two times higher than those with low comfort. In fact, people with a high comfort level were significantly more likely to say they were knowledgeable about the composition and performance of their investments (84%) vs. those with low comfort (18%).

Personalizing Experiences Based on Engagement

Advisors can consider adjusting their approach depending on an investor’s engagement level. For example, if a client has an aggressive risk tolerance this may indicate the client is more engaged. Based on this, the advisor could check if the client would prefer more frequent portfolio reviews.

On the other hand, soft skills can play a key role for those who are less engaged. People with low comfort making investment decisions indicated that the top ways their financial advisor provides value is through optimizing for growth and risk management (62%), making them feel more secure about their financial future (38%), and offering peace of mind and relief from the stress of money management (30%).