Where are you on your financial journey?

Use the priority pyramid as your guide.

The priority pyramid is a six-level personal finance tool. It’s designed to help you figure out where you are on your financial journey and stay focused on the one area that is going to make the biggest difference in your life.

This article will help you determine where you are on the priority pyramid and lay the foundation for improvement at each level before moving on to the next. It’s a way to set goals for what you want to accomplish and build momentum through simple, easy to remember habits.

Source: Sellery, Bruce. “Moolala: Why smart people do dumb things with their money (and what you can do about it)” McClelland & Stewart, 2011, pp. 65

What are the levels of the priority pyramid?

Cash Flow

Do your expenses exceed your income over the course of a year? If they do, 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 long-term challenge, decreasing your expenses is a quick hack. Sadly that might mean unsubscribing from that new streaming service, or swapping that weekly food delivery order and meal prepping instead – but it will pay off. This is the most fundamental principle of personal finance – living within your means.

Debt

Once you’ve improved your cash flow, it’s time to focus on paying down any high-interest debt. For example, start eyeing that credit card debt and make sure you pay off every last cent. Carrying over any debt from month to month means you’re not ready to take the next step financially. 

You may be asking, “why don’t I work on savings and paying down my debt at the same time?” Eliminating credit card debt is a guaranteed return of whatever your interest rate is! Do that first, then focus on savings.

Savings

Now that debt is out of the picture, you can start building financial stability with 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. 

Once you have an emergency fund, you can allocate savings towards your desired goals, like saving for a home or a car, or that vacation that keeps calling to you. Make it your mission to feel as comfortable as possible at this level by staying practical and setting realistic goals as you work towards the big picture (we’ll learn more about setting SMART goals later).

Taxes

Lastly, take on your taxes by finding the right ways to maximize (or minimize) your taxes to your advantage. Make the most of tax-saving options like 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. Remember, with intentional planning, taxes can be a friend instead of an enemy.

Future financial planning

“Investment Performance” and “Optimizing Returns” are levels with more advanced strategies for financial planning. We won’t be able to do them justice in this article, so once you reach that stage, reach out to a professional adviser for more insights.

Key takeaways: how to determine where you are on the priority pyramid

Cash flow: are you earning more money than you’re spending?

• If no, think of 5 ways to start cutting expenses, or increasing your income. Those extra food delivery orders have got to go, or maybe you need to get a side hustle!

• If yes, jump to the Debt level.

Debt: have you eliminated high interest debt?

• If you’re earning less than you’re spending, and you have credit card debt or any other high-interest debt, this is what you need to work on.

• If yes, move on to Savings.

Savings: are you regularly contributing to your savings?

• If you’re regularly allocating money towards savings for specific goals, and have a safety net/emergency fund set aside, move up to Taxes.

Taxes: are you taking advantage of tax-saving options?

• Check your receipts and keep track of any qualifying rebates, credits or deductions from the past year. Speak to a tax specialist if you need extra advice.

• Consider contributing to a savings plan that bypasses or minimizes taxes (e.g., a TFSA or RRSP).

Words of encouragement: accept where you are

Give yourself some grace and take things one step at a time when it comes to your financial goals. We all have to start somewhere, and focusing on that first step is all you can do.