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!
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I love this! By the way, I would say my wife and I are one step from the top of the pyramid as of right now! Love the graphic too!
Awesome that you’re so close to the top! Working your way up really does bring freedom
It sure does! I can’t believe how much has changed since we started pursuing it! We’ve become debt free (except our house, built up a comfortable amount of savings in our emergency fund, have established our investing contributions, and have even been able to transition to a single income). It’s an amazing feeling that has really taken some hard work, but is so worth it in the end!
I may have flipped the pyramid a little bit and paid off all my debt while I’m still investing for retirement and my dreams 🙂 But other than that I love the pyramid!!!
Nice! I put debt freedom at the top because many will be working to pay off a mortgage as one of the final things before financial freedom. But some people don’t have a mortgage, or they’ll pay it off before finishing the other steps.
I love the financial pyramid idea. Knowing your why and your numbers is definitely the foundation. Without that, you won’t know where you’re going.
Very true! You can do the other steps but if you don’t know where you started, where you’re going, and why it’s harder to track whether you’re making the progress you want.
Any woman who quotes Shakespeare as she talks money, has this English major’s respect.
I used to read Shakespeare for fun when I was younger-I can remember reading King Lear in 6th grade. Readings always been one of my favorite hobbies ❤️
Looking forward to your upcoming posts! The solid successful financial foundation is very import for the high pyramid. Without solid foundation, the pyramid will be in risk. I am climbing the pyramid.
I’ve never bothered with an emergency fund. I just have a baseline number to keep in our bank account (one month’s income) and the rest I transfer immediately to loan payments, investments, etc.
The way I see it if I have a sudden expense then I can use our credit cards, or pay it off over a few months. It’s not worth letting money lie idle for a mythical “emergency” that would require several months’ income at short notice. I’ve never encountered such a situation and don’t expect I ever will.
Unfortunately I’ve encountered just such an emergency-when my husband almost died of septic shock at 36. I was grateful for our emergency fund then. Of course I hope nothing like that happens to anyone else-glad to hear you’ve never experienced that kind of emergency.
I can imagine that it was a really difficult time – and I am glad to see from your blog that he is now better 🙂
I think the main difference though perhaps comes from the type of social safety net available in the country where you live. For example I was once bed bound and had to have a spinal implant put in – but the state covers that. It also pays out a benefit to people who are sick, so financially we are not impacted extremely negatively by illness. Perhaps that is why I perceive it differently.
That makes sense-I know the US is terrible when it comes to the safety net in many ways. Our costs were $7k just in medical-after insurance. I know in many other countries it would have been completely covered
My goodness that is a lot of money! I totally appreciate why you need an emergency fund if you could end up facing such costs when going through difficult times such as illnesses. Taken in that context it really makes sense. Hope you never need it again though XXXX
Nice simple and straight forward post
I think the pyramid will help a few friends I am trying to get on a path to financial health and I will be sharing this with them. Keep up the good work.
Glad to hear it will be helpful!