Needs based planning

What Is Needs Based Planning?

Needs based planning is a fundamental approach within Financial Planning that prioritizes identifying and addressing an individual's or family's essential financial requirements before allocating resources towards broader aspirations. This method ensures that critical areas like daily living expenses, debt obligations, and protection against unforeseen events are adequately covered. By focusing on present and future necessities, needs based planning provides a solid foundation for long-term financial stability. It contrasts with approaches that might emphasize investment returns or wealth accumulation without first securing basic financial well-being. Needs based planning is crucial for individuals at all life stages, helping to establish a baseline of security before pursuing more aspirational Financial Goals.

History and Origin

The evolution of financial planning from a product-centric sales approach to a client-focused advisory profession laid the groundwork for methodologies like needs based planning. Early in the development of modern financial planning, particularly in the late 1960s and early 1970s, pioneers like Loren Dunton emphasized a more comprehensive view of an individual's financial life, moving beyond simple product sales. This shift led to the formalization of financial planning as a distinct profession and the establishment of credentials like the Certified Financial Planner (CFP) designation⁵. The recognition that individuals needed structured guidance to navigate increasingly complex financial landscapes, from Retirement Planning to Insurance and Estate Planning, naturally brought needs to the forefront. Early financial advisory practices recognized that securing basic needs was a prerequisite for effective long-term financial strategies⁴.

Key Takeaways

• Needs based planning identifies and prioritizes essential financial requirements for individuals and families.
• It serves as a foundational step in comprehensive financial planning, ensuring core security.
• Key areas addressed include everyday expenses, debt management, and risk mitigation.
• This approach helps establish a realistic Budgeting framework and builds an Emergency Fund.
• It forms the bedrock before considering more discretionary Investment Strategy or wealth accumulation.

Formula and Calculation

Needs based planning does not typically involve a single, overarching formula. Instead, it relies on a series of calculations and assessments across various financial components to quantify an individual's needs. These calculations often include:

• Living Expenses: Summing up all recurring monthly or annual costs for housing, food, transportation, utilities, and other essentials.
• Debt Servicing: Calculating minimum payments required for Liabilities such as mortgages, loans, and credit cards.
• Insurance Coverage: Determining adequate coverage amounts for life, health, disability, and property insurance to mitigate Risk Management associated with unforeseen events.
• Emergency Savings: Establishing a target amount for an Emergency Fund, often three to six months of living expenses.
• Future Needs: Estimating future financial needs such as retirement, education, and healthcare, accounting for factors like Inflation.

These individual calculations contribute to a holistic understanding of financial requirements. For example, calculating future retirement needs might involve:

Where:

• Present Cost represents current annual expenses.
• Inflation Rate is the assumed rate at which costs will increase.
• Years to Future is the number of years until the need arises.

Similarly, calculating required life insurance coverage often involves assessing current and future financial obligations for dependents, subtracting existing assets, and considering earning potential (or Human Capital).

Interpreting Needs Based Planning

Interpreting needs based planning involves a critical assessment of whether essential financial requirements are being met and how current resources align with future necessities. If current Cash Flow is insufficient to cover identified needs, the plan would highlight a deficit, prompting adjustments to spending or income generation. Conversely, if needs are well-covered, it signals financial security and the potential to redirect surplus funds toward discretionary goals or enhance existing provisions.

For instance, identifying a significant gap in Retirement Planning based on projected needs would necessitate an increase in savings rate or a re-evaluation of the desired retirement lifestyle. This interpretation also involves understanding the trade-offs. Allocating more resources to immediate needs might limit funds available for growth-oriented investments, while neglecting current needs can create financial vulnerability. A competent Financial Advisor can help interpret these assessments, providing clarity on priorities and actionable steps.

Hypothetical Example

Consider Maria, a 35-year-old marketing professional with two young children. Maria decides to engage in needs based planning.

Step 1: Identify Current Essential Needs:
Maria lists her monthly expenses: mortgage ($2,000), groceries ($800), utilities ($300), transportation ($250), health insurance premiums ($400), and childcare ($1,200). Her total monthly essential expenses are $4,950.

Step 2: Assess Current Income:
Maria's net monthly income is $5,500.

Step 3: Calculate Current Surplus/Deficit:
$5,500 (Income) - $4,950 (Expenses) = $550 (Monthly Surplus). This indicates Maria can cover her current needs.

Step 4: Project Future Needs (e.g., Emergency Fund):
Maria determines she needs six months of essential expenses for an Emergency Fund, totaling $4,950 x 6 = $29,700. She currently has $10,000 saved.

Step 5: Identify Future Needs (e.g., Children's Education):
Maria estimates future college costs for her children. After researching, she determines she will need approximately $200,000 per child, adjusted for Inflation, by the time they reach college age.

Step 6: Develop a Plan:
Based on her $550 monthly surplus and the identified future needs, Maria allocates $300 per month towards building her emergency fund until it's fully funded. The remaining $250 is directed towards a dedicated education savings plan for her children. This needs based approach ensures her immediate financial security is being addressed while simultaneously planning for significant future obligations.

Practical Applications

Needs based planning is widely applied across various aspects of personal finance and Investment Strategy.

• Personal Financial Planning: At its core, it's used by individuals and Financial Advisors to establish a baseline. Before considering aggressive Asset Allocation or complex wealth accumulation strategies, planners ensure clients have adequate liquidity for day-to-day living and robust protection against Risk Management events. This is especially relevant in establishing an Emergency Fund or ensuring proper Insurance coverage.
• Government and Social Programs: Government agencies often employ needs-based assessments to determine eligibility for social welfare programs, housing assistance, and educational grants. The Consumer Financial Protection Bureau (CFPB), for example, works to ensure consumers can access fair and transparent markets for financial products, recognizing the fundamental financial needs of individuals³. Their efforts often involve educating consumers about managing their finances to meet essential needs.
• Corporate Benefits Planning: Companies often structure employee benefits, such as health insurance, retirement plans, and disability coverage, around the perceived needs of their workforce, aiming to provide a safety net that addresses common financial concerns.
• Disaster Relief: Following natural disasters or economic crises, needs based assessments are critical for distributing aid and resources to affected populations, prioritizing essential requirements like food, shelter, and medical care.

Limitations and Criticisms

While needs based planning provides a crucial foundation, it has certain limitations and criticisms:

• Static vs. Dynamic Nature: Needs can change significantly over time due to life events (e.g., marriage, children, job loss, health issues). A purely needs-based plan might become outdated quickly if not regularly reviewed and adjusted. This necessitates consistent monitoring and flexibility in Financial Planning.
• Underestimation of Discretionary Spending: Focusing solely on "needs" can sometimes lead to an underestimation of important "wants" that contribute to quality of life, such as hobbies, travel, or charitable giving. Neglecting these can make a financial plan feel overly restrictive or unsustainable in the long run.
• Difficulty in Defining "Need": What constitutes a "need" can be subjective. While food and shelter are clear needs, the quality or cost of these can vary widely, leading to different interpretations of necessary expenses. This can make Budgeting challenging.
• Lack of Aspiration: While excellent for foundational security, a strict needs-based approach may not inherently foster aspirational goals or significant wealth accumulation beyond what's required to meet basic future obligations. It might not emphasize optimizing Investment Strategy for maximum growth.
• Behavioral Challenges: Even with a clear plan, human behavior—such as procrastination, overspending, or succumbing to market anxieties—can derail a needs-based strategy. Studies have explored the challenges in consistently following financial advice and the impact of behavioral factors on financial outcomes. Th²e benefits of financial advice may also be overstated without methodological rigor in evaluation.

#¹# Needs Based Planning vs. Goals-Based Planning

Needs based planning and Goals-based planning are often discussed together in Financial Planning, representing different but complementary facets of the planning process.

The key difference lies in their starting points and primary motivations. Needs based planning ensures the base of the financial pyramid is solid, addressing fundamental survival and security. It asks, "What do I need to survive and thrive securely?" In contrast, goals-based planning builds upon this foundation, asking, "What do I want to achieve with my financial resources?" While needs-based planning ensures financial stability, goals-based planning provides direction and motivation for accumulating wealth and leveraging Investment Strategy to achieve specific life objectives. Many financial professionals advocate for an integrated approach, where needs are addressed first, creating the capacity to pursue Financial Goals.

FAQs

What are common "needs" in financial planning?

Common "needs" include essential living expenses (housing, food, utilities, transportation), debt payments (mortgages, loans, credit cards), and protective measures like Insurance (health, life, disability) to safeguard against financial shocks. Building an Emergency Fund is also a core need.

How does needs based planning differ from budgeting?

Budgeting is a tool used within needs based planning. Needs based planning defines what financial requirements you have and why they are essential, while budgeting is the process of allocating your Cash Flow to meet those defined needs and other financial objectives. Needs based planning provides the framework, and budgeting is the operational execution.

Is needs based planning only for people with low income?

No, needs based planning is essential for everyone, regardless of income level. While it's critical for those with limited resources to ensure basic survival, higher-income individuals also use it to establish a strong financial foundation, cover substantial Liabilities, and secure their lifestyle against unexpected events before pursuing more aggressive wealth growth strategies. It forms the bedrock for any sound Financial Planning strategy.