Week 3: Building Your Financial Future


Building Your Financial Future

By following our five stages towards financial security you can prioritise your financial goals without being exposed to unnecessary risks along the way.

Whilst everyone’s financial needs and goals are different and vary over time we have borrowed from well-known psychological principals to develop a road map or hierarchical pyramid to help investors prioritise the stages and steps to achieving financial maturity.

As in life where an individuals’ physiological needs such as food and shelter form the base of their pyramid, followed by physical safety, social needs such as friendships and family, esteem needs like respect and a sense of achievement lead to the final stage of self-actualisation.

With these basic stages in mind it is apparent that you can’t worry about safety unless you have access to food, and whether you’re fulfilling your ultimate purpose in life might feel irrelevant if you’re lonely.

By applying a similar approach to your finances, you can prioritise what’s most important among what seem like an overwhelming number of responsibilities, from paying o debt to saving for retirement. Applying these basic concepts, we present the following hierarchy of needs designed to provide general financial security throughout an investors life:

1. Level One [BASE]: earning enough income to meet monthly obligations, purchasing health insurance, establishing base savings and an emergency fund.

2. Level Two: increasing income, purchasing life and disability insurance, repaying high-interest debt, beginning investing with a view to retirement.

3. Level Three: buying a home, repaying low-interest debt, providing for your children, increasing your investment activities towards increasing your retirement savings.

4. Level Four: providing for your aging parents, saving for your children’s education, paying o your mortgage before retirement, further maximizing your retirement savings, considering long term care insurance.

5. Level Five [PEAK]: retiring and developing a retirement income strategy, fulfilling your dreams and planning your legacy.

By adhering to a general set of principles to guide you towards financial security you can not only help to prioritise your financial goals but you can also make sure you aren’t exposed to unnecessary risks along the way.

While some steps shouldn’t be pursued out of order, there is some flexibility in applying the five basic stages, for instance building an emergency fund might be difficult if money is tight and as such might need to wait until Level 2.

And remember not all of us can wait until we retire to use some of our savings to ful ll our dreams; many of us need small doses of satisfaction along the way to enjoy ourselves and to maintain the motivation to keep working, saving and investing. With this in mind, we believe that following our five stages towards financial security with some tweaks to reflect individual circumstances, will work for most people over the long term.