Are you fiscally healthy?
A while back, I came across this blog post by the MadFientist about a money version of Maslow's Hierarchy of Needs. If you haven't heard about Maslow's Hierarchy of Needs, here's a cliff notes version: All humans have basic fundamental needs and are motivated to fulfill them - but there is an ordering to those needs. First food and shelter, then safety, belonging, respect/recognition and finally reaching one's fullest potential - in that order. If you don't have food or shelter, you're probably not focusing on trying to gain respect from others. The money of version of this takes you from not having enough money for basic needs to being financially independent all the way to having enough money to spend/give to fulfill your life's purpose.
It got me thinking that there is an ordering to the types of things you worry about when it comes to money. When you are worrying about how to put food on the table or make the rent this month, it's not the right time to be talking about retirement savings or whether you should be investing in stocks. But unlike the hierarchy described above - I don't like to think of them as stages of 'need'. It makes more sense to think of the state of our finances as stages of health. And like in real life, our health sometimes goes up and down. If we fall ill, we have to take time to recover. Some of us maintain average health but some of us are super-fit.
So what are the stages of fiscal health?
ICU - This stage means you are in intensive care. Things are very precarious and you are struggling for survival. In this stage, you do not have enough to cover your basic needs, be it food, rent or other daily necessities. Loan sharks or payday loans sometimes help with the gap until the next paycheck. You may be robbing Peter to pay Paul. You may juggling bills trying to figure out which is the most urgent that needs to be paid now, leaving the rest unpaid until the next payday. You screen phone calls from creditors and debt collection agencies. Perhaps you've already gone through bankruptcy. There is no luxury to think about long-term goals, credit scores or savings because you are trying to just get through each day... each week.
Outpatient care - This stage means you're mostly able to cover daily expenses but you're still on the road to recovery. Maybe the bankruptcy is behind you and you are just working through the payment plan. Or you just started a new job after having been unemployed. You don't need to worry about having enough for rent and food anymore, but everything else is still a juggling act. You don't have much (if any) savings and you still occasionally need to borrow money or rely on loans/credit cards for special occasions or unexpected emergencies. You also may have had some debt piled up from when you were in ICU that you need to start paying off now. Your credit score is in the dumps but you'd like to start working on it.
Healthy - This stage means you're able to cover your daily expenses and then some. You have a little bit saved up for emergencies and you can do things like go on vacations without going into debt. You may have some loans to pay off, like a car, school or home loan, but you've got it under control and make your monthly payments on time. You do not need to ask friends or family to borrow money and have a decent credit score, should you need access to credit. You may be saving for kids' college or retirement. This stage is pretty comfortable and your money concerns tend to be about 'wants' rather than 'needs'.
Fiscally fit - This stage means you've got this money thing down. Your living expenses are definitely below what you make and you might even be financially independent already. You are maxing out your contributions to retirement accounts and also investing additional money in taxable accounts. You pay off your credit card each month in full and have an excellent credit score. You've got plans for your long-term financial goals (like kids' college or retirement) and generally don't have much in the way of money concerns. At this stage, you tend to be the one lending money to others rather then being the borrower. Your money concerns are no longer around 'needs' or even 'wants' but how to accomplish 'dreams' with your money.
These are general buckets for stages of health and I'm sure that many people will be able to identify with aspects of multiple stages. It's ok if you don't fit into a single stage, although I expect one of the stages to resonate more than the others. The more important question is - are you happy with your current stage of health and would you like to improve?
I'll leave you with some parting thoughts about these stages of health:
- Health is not static - People can go from healthy to unhealthy back to healthy many times and that is normal. Some things that affect your health are under your control (what you spend your money on). Other things are not under your control (like getting laid off).
- Being fiscally fit is not for everyone - The ordering of the stages could imply that everyone should avoid ICU and everyone should get to the 'fit' state, but that is not my intent. While being in the ICU is probably not desirable for anyone, being healthy is a perfectly reasonable place to be. Just like in real life, people who choose a life of fitness need to put in more time and energy to achieve it, the same is true for fiscal fitness. Maybe it requires having to work more hours or pursue a different career to make enough money to do those things and since money isn't everything, maybe those trade-offs are not worth it for you.
- Different focus at different stages - I alluded to this earlier in this post, but what you need to do when you are in ICU is not the same as what you need to do in the healthy stage. If you are in ICU, you are probably not thinking about savings and that is totally fine. For folks in ICU, your focus should be on how to earn more money or reduce your living expenses. Folks in outpatient care need to focus on paying down debt and building savings. Only when you get to healthy should you even think about investing in the stock market or things like buying a home.