How to structure your finances

When you start working and making money, its really important to know how to have everything organized.

This is how I was taught to structure my finances.

Imagine a pyramid made of layers. It looks like the following..

Investment
Savings/Emergency fund
Debt Management
Protection


The bottom layer is the foundation, the thing that should be done first. Protection will included different types of insurance. Health insurance usually comes to find first.

Should something happen to you, injury, sickness, etc, and you go to the hospital. Hospital bills can be very expensive. You want to protect yourself in case you run into medical bills of tens of thousands of dollars.

In this section, you would include other types of insurance if you have any legal exposure like if you own your own home or have your own business. You need to have the right type of insurance to protect yourself from lawsuits.


Above protection is Debt Management. Whatever debts/loans you have, it is your goal to make sure that the balance goes down every month. It is your ultimate goal to have all of these debts paid off.

Debts/loans most always come with an interest rate. Left untouched, the balance will grow. Grow uncontrollably.  Credit card debt can carry interest rates of around 20%.

This is why you focus on debt management way before investment. Typically, the interest rates charged on debt will vastly surpass the interest rate you could earn on any safe investment.

Last I checked, the best interest rate I could get at a CD at my bank is three tenths of one percent.

After getting debt under control (total debt decreasing every month). The next thing you want to have is an emergency fund.


Typically, you want to have 3 to 6 months of your earnings saved in a bank account in case something unexpected something. Though the amount is not exact, you can adjust the amount to how much you feel comfortable with.

Say you lose your job, have unexpected bills, your car breaks down, you need to maintain your house. You have that money to take care of yourself for a little while.


At the very top, you have the last thing to focus on. Investment.

If you have spare money after taking care of protection, debt, and emergency fund. You can try to invest it into different things to earn a better return.

Investment is the last thing you focus on for a few reasons. You might have to hold your investments for several years to see a return. Your investments might not be very liquid. The value of your investments will fluctuate. You might take a loss on your investments.




The mistake that a lot of people make is that they focus on investment first without considering anything else. So if a man loses his job, and he has everything in investment with no emergency fund. He might have to sell off his investments at a loss.