Figure out where you are on your financial journey

Use the priority pyramid as your guide.

Welcome to the second article in the Learning Hub. As mentioned previously, there’s no better way to start than to give yourself some grace, accept where you are, and take things one step at a time when it comes to your finances.

When training for a marathon, the amount of kilometers you need to run can be overwhelming - causing many to not even train or stop running altogether. Instead, it’s better to slow things down, be present and get laser focused on every step. This is how you can lay the foundation for what you want to accomplish and build momentum through simple, easy to remember habits.

So with that in mind, the priority pyramid is a wonderful tool to help kick off your journey. It’s designed to help you focus on the one area that is going to make the biggest difference in your life.

What’s a Priority Pyramid?

First things first, what exactly is this so-called “Priority Pyramid?” Think of it like Maslow’s Hierarchy of needs, but for finances! You have to take care of the basics - your food and shelter needs - before you can have the freedom to ponder the meaning of life, right?

This pyramid has six levels, and it’s your job to determine what level you’re at. You can only be on one level at a time, and you will likely move up and down the pyramid levels throughout your life as your circumstances change. That’s normal! But it’s important to focus on only one level at a time, because we know that multitasking isn’t all it’s cracked up to be.

What’s the Cash Flow level and why do we start here?

Starting from the bottom (not to be confused with any rap anthems!), we have the Cash Flow level. Here, you’ll reflect on whether your income exceeds your expenses over the course of a year. If it doesn’t, then your goal will be to improve your cash flow. The most obvious way to do this is to increase your income. But if that’s a longer-term challenge, a quick hack is to decrease your expenses. Sadly, that might mean cutting down on that extra large mocha with the artisan whipped cream to only once a week, but it will pay off. Okay, we’re exaggerating, but you get the idea. This is the most fundamental principle of personal finance…living within your means. If your income exceeds your expenses, you can move on to the next level.

What’s a debt level and how do we beat it?

Now that you have a surplus, it’s time to focus on paying down any high interest debt. For instance, start eyeing that credit card debt and make sure you pay off every last cent. Eliminating credit card debt is a guaranteed return of your interest rate and carrying over any debt from month to month means you’re not ready to take the next step financially. You might notice that the pyramid builds upon itself. If you have cash flow from the first level, then you can begin tackling debt at the next level.

What’s this whole savings thing all about?

With debt out of the way, you’re ready to start building your savings. To get started, you should build a savings nest egg. This will act as an emergency fund or a buffer in times where you have no other options. It’s a way to give yourself peace of mind. Next, you can start to allocate savings towards your desired goals, such as saving for a home or a car, or that vacation that keeps calling to you. Maybe that mocha can be indulged twice a week? Whatever that “dream”’ is, make it a mission to feel as comfortable as possible at this level by staying practical and setting realistic goals (we’ll talk more about that later).

What’s all the fuss about taxes?

Lastly for this lesson, is the taxes level. At this level, it’s about finding the right ways to maximize or minimize your tax situation to your advantage. Make the most of tax saving options such as potentially paying less or qualifying for deductions and/or credits. Think of home renovations or special rebates as an example. You could also look into deferring income taxes, by contributing to a RRSP or TFSA.

Future thinking, present minded.

The final two layers of the pyramid, Investment Performance and Optimizing Returns are outside the scope of our work for this series because they tackle more advanced strategies on the financial journey. But with that in mind, there are still things you need to do at every level of this pyramid. Actions such as filing taxes or setting up car insurance is non-negotiable, mostly because that’s the law. So keep yourself grounded and protected against any unneeded headaches by staying on top of these items.