The Priority Pyramid

Are you having trouble deciding how to set your financial priorities? Bruce Sellery has devised a system that will help you reach your goals.

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Question

I’m a 25-year-old graduate and am into my second year of employment in a hospital. I am currently debt-free and am thinking about venturing into saving and investing. I’m looking for some direction. I understand that starting early gives me an advantage, but I want to make sure I start out right.

Answer

As you get better and better at video games you get to move up to the next level. This makes you cool.

Moving up to the next level in mastering your money is even cooler. Trust me. But it can be an overwhelming task. There is so much jargon out there, almost none of which you learn in school. Plus, for most of us, money topics are really boring.

Developing your financial skills is like a game only the stakes are much higher. You have to work your way up the levels, but it can be hard to figure out where to start. To help you determine where you should focus your energy I developed something called the “Priority Pyramid.” (Click here to check out the video)

Figuring out your focus with the Priority Pyramid:

The Priority Pyramid is a riff on Abraham Maslow’s Hierarchy of Needs. Maslow was a noted American psychologist who asserted that our most fundamental physiological needs are the bottom of the hierarchy (What am I going to eat right now?). These needs must be met before you can move up to the next level in the pyramid. Our self-actualization needs are the top of Maslow’s hierarchy (What is my purpose in life?).

The same thinking applies to your money. Rather than trying to work on everything all at once, figure out what you need to do first. Once you meet those financial milestones you can move up to the next level on the pyramid. Simple? Sure is.

Moving up the levels of the Priority Pyramid:

Cash flow: At the base of the pyramid is cash flow. Are you earning more than you’re spending? Before you do anything else you need to make sure your income exceeds your expenses. If it is, move up to the next level. If it isn’t then you now know exactly what you need to focus on: increase your income and/or cut your expenses. Period.

Debt: Have you eliminated credit card debt? The best return on your money is paying off that debt pronto. You’ll save anywhere between 15% and 30% in interest—guaranteed. Try getting that return on the stock market.

Savings: Are you regularly contributing to savings? The rule of thumb for retirement savings is 10% of gross income. You might also want to save for a house, a vacation or a miniature dachshund.

Taxes: You have a savings plan in place, but are you taking advantage of tax savings vehicles and other government programs? For example, RRSPs, TFSAs, RESPs and RDSPs.

Investment Performance: Don’t be the obnoxious one at the bar, bragging about shooting the lights out with your brilliant stock picks. Instead, focus on basic performance. Are your investments matching the performance of their benchmark index over time? A lot of people simply stop at this level; They are happy with their life and don’t want to invest the time and energy it takes to move up one more level on the pyramid. But if you do….

Optimize returns: At the top of the pyramid, ask yourself if there are other strategies you could employ to maximize your goals. This could include investing in specific sectors or regions, or playing around with commodities or rental properties. But do this only after you have done everything else.

Using the Priority Pyramid in real life:

Let’s say your dad is one of those people who likes to talk nonstop about investing—where, why, how much, and so on. All that is nice, but before you can even think about the “investment performance” level of the pyramid, you need to get a handle on your cash flow. Smile warmly at dad, then shift the conversation to what matters to you, or to one of the twin black holes of discourse, religion or politics.

Let’s say you are further up the pyramid. You’re earning more than you’re spending, don’t have a balance on your credit cards, you save 10% of your pay every month, and that money goes directly into your RRSP. At that point you would focus on investment performance and compare the performance of your investments against your benchmark. You’re still not talking to your dad about junior mining stocks, but you’re closer.

Win the game by focusing on your No. 1 priority:

Once you figure out what your No. 1 priority is, focus on it ferociously. And after you’ve achieved it, proudly move on up to the next level. Like a video game, only with bigger rewards.

ask@moneysense.ca

20 comments on “The Priority Pyramid

  1. thanks alot this is really helpful to me as well, i've just recently graduated and entered the workforce. maybe the magazine can focus more on articles of the same nature. thanks again

    Reply

    • Pleasure. And send any specific questions you have to us via the website. I'd be happy to include them in the mix. Thanks Leslie.

      Reply

  2. You misspelled "you're."

    Reply

  3. I'm a twenty-something who recently graduated, so this is very helpful for me.
    What about student loans? Should they be on the same level as credit card debt? I am starting to save up for a down payment on a home (for a few years down the line) and I'm wondering if it's a better choice to pay down my student loan debt before I start this saving. Thanks!

    Reply

    • Great question: It depends on the interest rate. Credit cards have rates ranging from 14-29% – it is unlikely your student loan rate is that high – so they definitely should be paid off before you accelerate student loan payments. Knowing almost nothing about your circumstances, I would pay the minimum monthly payment on your student loan and starting saving on your down payment. The other thing to factor in are government tax savings vehicles: RRSPs in Canada, 401K's/IRA's in the US.

      Reply

      • Great reply Bruce. I would add one more in Canada, TFSA. The Tax Free Savings Account is an excellent, but new, vehicle that allows money to grow tax free plus when you retire and start drawing it down it is classed as a savings, not income so it won't affect OAS.

        Reply

  4. Does debt also include student loans? The article only addresses credit card debt and I am wondering whether I should focus on paying off my student loans as soon as possible.

    Reply

    • I'd recommend paying off your smallest debt and then work on your largest last. I'd put home mortgage after you had 3-6 months of savings.

      Reply

  5. Please don't forget to insure your cash flow. You can do this with disability insurance, If you are disabled, your cash flow will continue so that you can meet your basic needs instead of consuming (and fairly quickly) all your hard earned savings.

    Reply

  6. The power of focus is important. If you are trying to do 10 things at once financially you'll never see fruit and just quit. Focus on 1-2 financial goals at a time to see some quick success.

    The pyramid is a good starter tool, but ignores important basics: insurance, giving, will, mortgage debt, etc. Bruce, how do you address those in your pyramid?

    Reply

    • Hi Brent,

      All important elements – I simply had to draw the line somewhere. For the folks that I work with, the areas in the pyramid are the highest leverage areas for day to day life.

      In today's interest rate environment mortgage debt isn't as important as credit card debt, saving or investment performance. Giving doesn't apply to everyone. And will's and insurance are hugely important, but not so much for a 25 year old, the age of the writer.

      Bruce

      Reply

  7. First step should be you're spending, not your spending.

    Reply

  8. Great article! I often find myself following some of the steps within the pyramid, but it's nice to have an actual diagram and something more structured to follow. I am still a university student so it makes it a bit tougher when it comes to saving etc. But this is a great guideline!

    Reply

    • Thanks for the comment Lauren. I love that you're aware of your money at this early stage in your life. So many young people aren't and they'll pay for it down the road.

      Reply

  9. This is rather useful and probably goes of several things (like long term work and educational goals)! I'll totally have to share it.

    Reply

  10. One other important part is to then pass this on to the next generation. My children (6 and 8) have two bank accounts already; one for long term savings and one for medium term. They have been taught to "invest" 10% of their allowance in each. This instills the saving concept at an early age. My 8 year old has started mowing lawns and now does this with her wages as well. We are teaching her about debt as she had to buy her own equipment for this and went to the bank of dad for it. She had to agree to repay it at 5 dollars a week. This allows her to see that money isn't free and has to be paid back. Hopefully these lessons stick into adulthood.

    Reply

  11. Wow,Nice reading we have the same situation and I wanted to upgrade more of my money to at least reach my goals.I did enjoy reading of it because it really helps to properly spent your money to earn more savings.

    Reply

  12. Pingback: Building your Pyramid | Prosperous Not for Profit

  13. Pingback: Why Be Concerned About a Clothing Allowance When You’re Paying Big Investment Fees? » Welcome to CentsAbility

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