Chances are you're familiar with the food pyramid.
You know, the one you learned about in elementary school, with the pyramid-shaped stack of foodstuffs.
Well, we thought that a financial pyramid could be even more helpful to keep tacked to your fridge because while there's much debate over the healthiest diet—vegan? paleo? macrobiotic?—the building blocks in this money pyramid should remain consistent throughout your life.
So take a look at our nifty pyramid—and consider maybe even reviewing it with your own elementary school student. The USDA ain’t got nothin’ on this!
Building-Block One: Emergency Fund, Paying Off Bad Debt, Retirement Savings
Before it was updated in 2005, the original food pyramid advised people to consume lots of bread, pasta and crackers every day … hmm, maybe not. But when it comes to your financial foundation level, we think everyone can agree that before you do anything else with your extra cash, you should diligently (and consistently!) put money into an emergency fund, pay off bad debt (read: credit cards and personal loans) and start saving for retirement. In other words, less pasta, more awesome-sauce.
Building-Block Two: Insurance, Paying Off Good Debt
An apple a day may keep the doctor away … but not forever. Financial catastrophe can come in the form of appendicitis, an apartment fire or a car accident. Suddenly, you could find yourself dipping into your emergency fund—or throwing a couple thousand on a credit card. There goes all of your hard building-block one work! Unless, of course, you have insurance. It goes without saying that health insurance is crucial, but you might also benefit from renter's, life, disability and long-term care insurance.
Once you're properly protected, it's time to turn your attention to paying down good debt. If you’ve caught up on retirement savings, have a full emergency fund and you've paid off all high-interest-rate debt, you can focus on putting a dent in any good debt you may have, such as student loans, auto and business loans and your mortgage.
Building-Block Three: Saving for Other Goals, Investing, Estate Planning
If your level-one basics are covered, your debt is paid off and you’re fully protected by insurance (and making payments with ease), you may be wondering what to tackle next if you have a little extra money in your budget. Save for a trip! Or a home! Really, it’s up to you to determine what your bucket-list savings goals should be—just don’t make any of these common savings mistakes.
And while we're on the topic of saving for a goal, if done well, long-term investing can help you achieve your mission. If you’re saving for something that's five years out or more—say, upgrading to a bigger home or starting a business—you can consider putting the money into a brokerage account stocked with index funds to help fund that dream.
By the time you reach building-block three, you'll likely have investment accounts, savings accounts and maybe even a spouse and a house—which means you should have an estate plan in place, starting with a will and a living will.
Building-Block Four: Splurges
We all need to indulge in sweets and fried food every once in a while—and the same thing applies to money. That’s why we tell you to take 10% of a windfall from a tax refund, inheritance or bonus, and have fun with it. Of course, there’s a reason why this is the smallest section at the top of the money pyramid. Like chocolate cake, splurges are for special occasions—not every single day.