The Pyramid Metaphor for Fiscal Fitness – Part 1
Financial planners use a pyramid as a metaphor for fiscal fitness much like nutritionists use the Food Pyramid. Fitness (or proper nutrition) is optimized when built upon a solid foundation. The base of the foundation is about risk management.
One pillar of the financial foundation is the cash fund. You have probably heard the recommendation to maintain the equivalent of 3-6 months of living expenses as an “emergency” stash. The use of “emergency” is common but rather ominous. A better if slightly more awkward description is the “unexpected need” fund. You can plan for most future expenses such as a new roof on the house or a replacement vehicle because you can reasonably predict their lifespans. If only all of life were so predictable. Stuff happens. If you have a minor car accident and need to schedule a repair, it is not exactly an emergency but it is certainly not something you plan for. A dip into that cash fund is infinitely better than using credit.
Speaking of credit, let’s talk about debt. Staying with our metaphor…think of it as a sinkhole beneath the pyramid. If it is not filled first (read eliminated) the foundation will be very shaky indeed.
As a couple, even if you maintain separate finances, think like a community for the purposes of calculating the cash fund. You may be closer than you think!
Please share your thoughts. I love to learn from others and I suspect I’m not alone.
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Carol Christie is a Registered Investment Advisor and has a fee only financial coaching practice serving individuals and small businesses with a special focus on non-traditional couples.
Photo credit: stock.xchng.
February 6th, 2009 at 6:44 am
Carol: Great analogy. Actually, there are many parallels with how people should approach both physical and fiscal fitness. Thanks for wanting to contribute at Queercents. We’re looking forward to reading more of your thoughts!
February 9th, 2009 at 2:02 pm
I also love how neat the analogy is between physically and financial fitness- especially when it comes to changing your financial habits. I liken it a bit to dieting- you can’t just change your actions temporarily, you have to change your habits.
February 11th, 2009 at 12:57 pm
Thank you Nina and Andrea for your comments. I plan to use the comparison of eating habits and financial habits with clients!
March 6th, 2009 at 2:35 pm
[...] described the use of a pyramid as a metaphor for fiscal fitness (see The Pyramid as Metaphor – Part 1 and Part 2). Insurance is a central component at the base of the foundation. Without it, everything [...]
April 13th, 2009 at 12:51 pm
[...] Also choose the highest possible deductible to keep those premiums low. If you have built up your cash fund, you will be prepared to cover your deductible. If you are not healthy, or have a preexisting [...]