I’m not involved in a get-rich pyramid scheme, but I was thrilled to come across a financial pyramid chart to help me stay motivated to be debt free. A recent article by LearnVest outlined the four building blocks to healthy personal finances. Instead of using the food pyramid to guide healthy eating choices, the personal finance pyramid aims to help people make better money choices. The bottom of the pyramid, which is the widest, lists emergency fund, bad debt repayment and retirement savings. The next level is good debt and insurance. Climbing up the pyramid, I find saving for other goals, investing and estate planning while the smallest, highest point is reserved for “splurges.” Having a visual representation of my financial priorities motivated me to move toward my goal of being completely debt free.
Having a solid base
It’s good to be reminded of the importance of an emergency fund. I have always tended to neglect saving. I shouldn’t be paying down my mortgage each month until I enough set aside for emergencies. This past week, I have focused on paying off my credit card balance and building up my emergency fund. After I have an emergency fund of $5,000, I’ll start working my way up the pyramid to the next building block. As far as my retirement savings, I am going to increase my contribution by 1 percent each year until I’ve maxed out my allowable contributions to a 401(k) and Roth IRA.
Paying off good debt
After getting rid of my bad credit-card debt and having a solid emergency fund, I’ll go back to paying off my good debt. I no longer have any student loan debt, which used to be considered good debt. I would like to pay off my mortgage early. At this point, I have about 13 years left on my mortgage. I can apply an extra $300 toward my mortgage as I have my primary financial goals met. As far as insurance, I have health insurance through my workplace. I also have life insurance to help my spouse and children if I die.
Investing and saving for other goals
The next building block of the personal finance pyramid is investing outside of retirement and saving for various goals. This category also includes estate planning. Most of my savings goals relate to future needs such as replacement appliances and a new air-conditioners. I don’t have any savings goals to fund frivolous dreams as I’m a more practical person. At the same time, I do need to be more on top of estate planning by getting my will finalized.
Saving room for dessert
The smallest point of the money pyramid is reserved for unnecessary but fun splurges. According to the LearnVest article, it’s fine to take 10 percent from a windfall such as inheritance or tax return to use for a splurge. I prefer to think of the splurge category as my reward in retirement after having my financial priorities in order my entire life. By the time I’m retired, I shouldn’t have any debt: good or bad.
I like the simplicity of using the pyramid as a guide to getting out and staying out of debt. Like the food pyramid, it’s just a visual reminder. I’m still tempted to eat too many sweets just as I’m tempted to overspend at the shopping mall. I don’t think I need anything more sophisticated to live a debt free life. I just need the discipline to be financially healthy.
More from this contributor:
Paying off My Mortgage Isn’t Stupid
Even Good Debt Has Been Bad For Me
3 Stupid Moves I Made to Get out of Debt