Are Your Finances in Order? Hierarchy of Financial Priorities

You may have heard about a sociologist named Abraham Maslow, and his Hierarchy of Needs. Put simply, he said you have to have your physiological needs (food, water, air) met before you can move up to safety needs (resources, employment, shelter). These continue to build to self-actualization, the desire to be the most that you can be.

At CovingtonAlsina, we have a similar concept, our Hierarchy of Financial Priorities. We use this to develop financial plans and prioritize goals for families and individuals.

At the very base is your will and legal documents. These include a Power of Attorney and your Medical Directive. If you have minor children, your will appoints a guardian for them if something happens to you.

The next step up is cash flow. While the primary goal is to spend less than you make, this is also the step to look at spending patterns and budgets. If your income fluctuates due to commissions or bonuses, you may have different needs than someone with a steady paycheck.

After cash flow we look at emergency savings. The ideal is to have at least enough to cover six months of living expenses. But how you build that and where you keep it are an important part of your plan.

We follow this with asset protection, which is just a fancy way of saying insurance coverage. Home or renter’s insurance, auto liability coverage, life and disability insurance, your health insurance plan, and possibly Long-Term Care insurance. Each of these can help if your plan takes an unexpected detour.

Next up is retirement savings. This can include your employer-sponsored plan such as a 401(k), SIMPLE, TSP, or 403(B). Outside of that you may have an IRA or just a taxable investment account. Rental real estate also impacts retirement plans.

After retirement comes other goals, such as paying for college, or buying a boat or second home. When it comes to college, remember this step comes after retirement. There are no student loans, Pell grants, or work study programs for retirement; in other words, put the oxygen mask on yourself first.

The final step, if we’ve done everything else well, is your estate and any philanthropic goals. How do we transition your wealth to the next generation, or leave a legacy in the community?

Across every step are taxes, and how we can best minimize that impact. Things like where we save, how we pay for insurance, and retirement accounts are all affected by taxes.