by Business Insider | April 16, 2014 11:45 am
You’ve probably heard of Maslow’s hierarchy of needs.
It’s the ranking of primary human needs for psychological well-being as described by American psychologist Abraham Harold Maslow, and is usually illustrated not unlike the old-school food pyramid. The financial blogger known only as Mister Squirrel recently shared his own version of Maslow’s hierarchy: the path to financial success (click here to find out exactly what the Pyramid looks like).
Squirrel, who “dreams of a non-corporate life,” calls his theory the Hierarchy of FIRE (Financially Independent and Retired Early). The idea is that once you’re operating in the highest tier with your money, you’re set up to be a financial success — and that applies whether or not you’re aiming for early retirement.
While you can get a more in-depth explanation on his website, here’s how the tiers break down, from most essential to least:
1. Surviving. Before anything else, we have to get our minds right when it comes to money. As Squirrel puts it, “If you think that the government will look after you, money will take care of itself, or you’ll win the lottery, then you’re not thinking about money correctly.” In this stage, you’ll also start living below your means, and spending less than your monthly income.
2. De-debting. While everyone’s debt situation is different, ridding yourself of “bad debt,” (the kind that costs you money without giving you any clear value in return, like credit card debt), needs to be checked off your list before you can make real progress.
3. Learning. This is where you set aside an emergency fund to keep you in the green should something go wrong, and start learning about the possibilities for your money. Which accounts should you use? Should you invest, and how? If you have a question, now is the time to find an answer. Luckily, you have the entire internet at your fingertips.
4. Investing. Time to make use of those answers. Squirrel points out that this stage doesn’t have hard borders — it will continue on through the pyramid’s last stages.
5. Optimizing. Now that you have your answers and have gotten your money in order, it’s time to start tweaking your plan to perfection: Plan for taxes, get a will, create a system to check on your money.
6. Freeing. “When you get to this stage,” Squirrel writes, “you should be ‘there.'” Now that you’re financially independent and perhaps have even retired early, you have predictable expenses easily covered by passive income streams.
The theory isn’t perfect — and Squirrel is the first to say that you should do your research before making any financial decisions — but it is a helpful template for thinking about your path to financial success.
Source URL: http://investorplace.com/2014/04/brilliant-pyramid-outlines-6-steps-financial-success/
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