I’ve been thinking a lot about my financial journey – the ups, the downs, the good and the bad – as well as all the different sources of financial information I’ve read over the years. I wanted to come up with a way to share my journey, and help you on yours, in a clear and easy way. Then one morning last week it hit me.
“CMO,” I thought, “managing your personal finances is like a pyramid. To build a pyramid you need a solid foundation, and you keep going up slowly until you reach the top.”
So I came up with the concept of “The Financial Pyramid”. We’re going to work our way from the bottom-the foundation – all the way to the top of achieving debt and financial freedom. Readers who know how much I love graphics (just check out my 2017 annual report and goals for an example) can already anticipate what happened next. Yes, I created a graphic to illustrate the idea in my head.
I debated where to put some of these concepts in the pyramid, and I may have forgotten something (if so-let me know what you’d add in the comments!). But I feel confident if you follow this you will achieve your dreams. You may currently be at the bottom – the top – or somewhere in between. But no matter where you are now, you can get where you want to be.
Know Yourself – Your Financial Foundation
The key to setting a solid financial foundation in your life is simple. Shakespeare said it best:
To thine own self be true – Shakespeare, Hamlet
To set a successful foundation in place, you need to know where you stand and you need to know your “why”. That’s where the three parts of the financial foundation come in. I’ll cover them briefly in this article but I’ll write more in depth about them separately as well.
Know Your Balance Sheet
This is also called a balance sheet, and it’s simply a list of everything you own, and everything you owe. Subtract what you owe from what you own, and voila! Net worth. This is important because:
- You’ll need a list of everything you own (assets) and everything you owe (debts, or liabilities) to measure your starting point
- You can’t effectively set good, solid, SMART goals unless you know where you stand
- You’ll need to get in the habit of tracking this regularly as you go up the pyramid to financial freedom
Doing this exercise will show you, in black and white, just how good-or bad-things are. Maybe you’re pleasantly surprised, or maybe you’re shocked how much you owe. The important thing is that you know. Now that you know where you stand, you need to figure out where you want to go.
Know Your Cash Flow
Cash flow is simple – it’s a list of what you have coming in every month, and what you have going out. Is this the same thing as a budget? No, you’re not creating a list of expenses. You’re simply tracking what your income is, and what your expenses are, for at least a month. This will give you a starting point for your later work – optimizing your expenses and achieving your dreams.
Know Your Dreams
Now you know where you stand right now – what you own, what you owe, and what you have coming in and going out. Once you’ve figured out where you are, you need to figure out where it is you want to go.
This is where you’ll figure out what your ultimate dream is. There’s no right or wrong answer here. Maybe you want to become financially independent by a certain age. Perhaps you want to send your kids to college and pay for it in cash. You might want to own a home, or go on a trip around the world. Dream big, and picture what your life will be like when you achieve what you are looking for. After you’ve landed on your dreams, you’ll want to make them into SMART (Specific, Measurable, Achievable, Relevent, Time-Bound) goals so you can make a plan to turn them into reality.
Knowing yourself is the first key step to financial freedom. It’s like that old saying – if you don’t know where you’re going, any road will get you there. Well if you don’t know where you are financially, and you don’t know where you want to go, you won’t be able to get there.
In upcoming posts I’ll go through each of these in more detail, and I’ll be sharing my journey up the pyramid. I hope you’ll join me!
Did I miss anything in my financial pyramid? Are you working on knowing your (financial) self better? Let me know in the comments!