Hierarchy of Expenses
By Kevin Estes
Hierarchy of Needs
It’s been 80 years since Abraham Maslow developed his famous Hierarchy of Needs.
A simplified version of his categories are:
Physiological
Safety
Belonginess & love
Esteem
Self-actualization
Some of these needs map directly to expenses. Others don’t.
Hierarchy of Expenses
I believe there’s also a hierarchy of expenses:
Basic need
Required
Autonomy
Experience
Gift
Let’s explore each layer.
Basic Need
This expense category ties directly to the lowest levels of Maslow’s Hierarchy of Needs.
Physiological Need
These are basics like:
food,
water,
warmth, and
sleep.
Safety Need
Next comes safety and security. Protection - either ourselves or by society - keeps us from harm.
Physiological and safety needs are critical. Failing to meet them is life-threatening.
Required
Up next in the hierarchy are required expenses.
These are things like:
taxes,
alimony,
child support, and
minimum debt payments.
They’re legally binding. Failing to pay them likely wouldn’t be life threatening. However, they could restrict someone’s personal liberties due to repossession or incarceration!
Autonomy
This is the third and perhaps most inspiring expense category.
Someone can expand their opportunities by spending on:
education,
investments, and
debt repayment.
They give people more control over their lives.
Education
Education can take many forms, including:
degrees,
continuing education,
certifications, and
specializations.
They could be acquired by self-study, on the job (usually instead of compensation), or through formal education.
Education might be paid by the:
individual - an employee buys a business leadership book,
by a loved one - a parent pays for college, or
by an organization - an employer or government agency pays for cross-training in a related field.
Investments
Some investments aren’t considered expenses because there’s essentially no reduction in market value from a purchase. However, it could depend on how the investment’s used.
Take gold, for instance. How the price of one ounce (1 oz.) of gold changes over time determines whether the investment will generate income or a loss.
If that same gold was instead used to create a conductive wire for a product sold to a customer, it would be an expense.
Investments are made with the intent to generate income. It creates financial flexibility for the investor!
Business ownership is a particular type of investment. Someone can come to own part or all of their employer in many ways ranging
from stock grants at a huge tech company
to purchasing a sole proprietorship.
The first is a job perk. The second is buying a job!
The impact of business ownership on someone’s finances are extremely variable. An employee may only have a tax expense with vesting stock. Purchasing a law firm may come with significant ongoing funding requirements.
Debt Repayment
Paying down debt also increases flexibility by reducing interest expense. Paying it off altogether would also free up cash flow for other things.
However, debt repayment has an opportunity cost. What else could that capital have funded?
A common debt repayment preference for people is:
consumer debt,
student loans, and
mortgage.
Experience
According to the U.S. Bureau of Labor Statistics, over 80% of jobs in the U.S. were in service industries in 2022.
Just think of the service positions someone might encounter on a wedding trip:
security agent,
baggage claim attendant,
flight attendant,
pilot,
rental car agent,
hotel receptionist,
concierge,
event planner,
florist,
photographer,
officiant,
caterer,
bartender,
musician…
Some of our biggest lifestyle decisions are basically experiences: pets, children, education, etc.
Even goods have an experience element. Although a Rolex costs 100x a Timex, they both tell time.
The difference - besides the first three letters? The experience buying, wearing, and servicing the Rolex! (Though I wouldn’t know.)
Similar examples abound:
staging for a home sale,
generic vs. brand name pharmaceuticals, and
Nissan vs. BMW vehicles.
It’s telling that the BMW slogan is “sheer driving pleasure.”
Of course, there are the traditional experience expenses such as sporting events, concerts, and other live events. Taylor Swift’s Eras Tour is estimated to have had a $5.7 billion impact on the U.S. economy.
It’s an experience economy.
The issue is that all this spending limits how much is available for other things. People are prioritizing experiences over education, investments, and debt repayment. Hopefully no basic needs or required payments are deprioritized!
Gift
The final and smallest expense layer is giving. Some of the most popular recipients are:
Immediate family members,
Friends and extended family members, and
Nonprofits
Like when an airplane cabin depressurizes, it’s important to take care of yourself before assisting those around you!
Immediate Family Members
Charity begins at home.
Gifts to immediate family members might include a:
car,
medical bill,
college education,
down payment for a home…
Fortunately, medical and education bills are exempt from the combined gift and estate tax limits if paid directly to the institution. Other gifts can be more problematic.
Friends and Extended Family Members
As wealth grows beyond what someone needs to fund their lifestyle, the question quickly becomes “Who?” not “What?”
Who’ll receive gifts?
Who’ll be invited to once in a lifetime trip?
Who’ll have some of their living expenses paid?
Nonprofits
The Tax Cuts and Jobs Act reduced some of the tax benefits of charitable giving by:
increasing the standard deduction,
capping the state and local tax (SALT) deduction at $10,000, and
doubling the estate tax exemption.
Nonetheless, philanthropy can still significantly reduce the tax burden for higher earners. Each situation is different. However, some especially helpful techniques include:
donating highly appreciated securities,
bunching multiple years of charitable giving into one, and
contributing to a Donor Advised Fund (DAF).
These and other methods can help maximize the tax savings for charitable giving already planned.
Values Drive Priorities
Of course, none of this is to say how someone should spend their money!
No judgment. Just tradeoffs.
What someone would consider a gift, someone else would consider required. Take private elementary school, for instance.
Personal finance is deeply personal. Our expenses depend on our values, circumstances, skills, availability, and thousands of other things.
If you’re interested in telling your money where to go based on your values…
Disclaimer
In addition to the usual disclaimers, neither this post nor this image includes any financial, tax, or legal advice.
