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4 Pillars of Personal Finance: Your Roadmap to Financial Success

four pillars of personal finance

When it comes to our personal finances, we all want essentially the same thing – to be debt free, to have fat wallets, and to know that a comfortable retirement is waiting for us down the road (sooner rather than later for those who aspire to FIRE). Despite these shared goals, many of us fall short and sometimes drastically so. According to the Federal Reserve’s most recent Survey of Consumer Finances, Americans have a median savings account balance of only $4500, and a whopping 29% of us have less than $1000 put away. In fact, the Federal Reserve’s Report on the Economic Well-Being of U.S. Households showed that 40% of Americans wouldn’t be able to come up with $400 in cash in case of an emergency.

Those are some bleak statistics.

Let’s be real here, though. Most of us have the ability to turn those numbers around for ourselves. It’s very easy to say that we just don’t make enough money to get ahead, or we couldn’t have foreseen bills X, Y and Z. It’s really easy to make excuses for our financial situation instead of taking charge of it. But the reality is that even when our finances feel out of control we have many more options than we often realize or (sometimes) want to admit.

It’s true that managing money can be stressful and overwhelming. But whether we’re upside down on our mortgage or car loan, swimming in student loan debt, or doing pretty dang well for ourselves thankyouverymuch, there are always choices we can make that will move us closer to where we want to be financially. Likewise, there are plenty of choices that will move us in the opposite direction as well. Our job is to choose wisely.

The Four Pillars of Personal Finance

At its core, personal finance is primarily comprised of four basic pillars: earning, spending, saving, and investing. Simple, right? Except as we all know, simple doesn’t always equate to easy.

One of the most important things you can do for your financial situation is to focus on tackling each of the four pillars. Depending on who you ask, the four pillars may vary, but the general idea is that to build a strong financial foundation and eventual wealth, you must spend less than you earn so you can consistently save and invest.

Pillar 1: Earning

Earning money is the first pillar because you can’t spend, save, or invest until you’ve actually got money in hand. For the vast majority of us, that means working because working is how we get paid. But all work is not created equal, and some of us earn at much higher rates than others. No matter where we are in our particular earning journey though – starving college student, single parent, successful corporate couple – the potential for making more money almost always exists.

  1. Side hustle. There are a huge number of opportunities to make money in the gig economy. You’re only limited by your time, energy, and skills.
  2. Ask for a raise. Assuming you’re relevant to your company and can legitimately show that you’ve earned a raise, it doesn’t hurt to ask.
  3. Sell unused items. Depending on what you have lying around, there is potential to bring in a fair amount of cash quickly.

Pillar 2: Spending (aka budgeting)

Spending is the second pillar because, as we all know, spending is inevitable. I mean, sure, you could live completely off grid and only barter for what you need, but that’s neither feasible nor desirable for most of us. For most of us, spending is a regular, ordinary part of our day-to-day lives. The trick is to spend less that we earn so that we always have a surplus and never a deficit. Again, super simple in theory but not always easy in practice.

  1. Create a spending plan. This ensures that you know where your money is going and allows you to dictate your spending rather than have it dictate you.
  2. Cut out unnecessary expenses. There are obvious contenders like the $5 latte, but plenty of not-so-obvious ones as well like downsizing your living quarters. The bigger the rock, the more of an impact on your bottom line.
  3. Above all else, spend within your means. Screw the Joneses (spoiler alert: they have debt).

Pillar 3: Saving

Pillar three is saving, because, if you’ve spent less than you earned, the natural result is discretionary income, aka extra money. Ideally, your savings should be in the form of an emergency fund, then 3 to 6 months of living expenses, all kept in a high-yield savings account (or similar) so that your money remains relatively liquid and keeps most or all of its value against inflation.

  1. Build your emergency fund. $1000 is ideal because it’s generally enough to cover most unforeseen emergencies – a new set of tires or other car repair, an insurance deductible, a trip to the vet, etc.
  2. Save 3-6 months of expenses. The 2019 government shutdown was a great example for the need to have substantial savings to cover ordinary expenses. Job loss is often unpredictable so having 3-6 months of your expenses covered means you’re prepared and have a better chance of riding out the storm.
  3. Keep your savings in a high-yield savings account. I personally use the Discover Online Savings Account. When I was shopping around their rates were among the highest available and they offered a cash bonus to new customers with a minimum deposit, no strings attached.

Pillar 4: Investing

Pillar four is investing – this is where the magic happens and your money starts to make you money. In order to build wealth you have to put your money to work!

  1. Contribute to your company’s 401K. For 2019, the annual limit is $19,000. At a minimum, contribute enough to get the company match if one is offered.
  2. Contribute to an IRA. For 2019, the annual limit is $6,000. Also consider contributing to a spousal IRA for a nonworking spouse.
  3. If you’ve maxed out contributions for both of the above, look into a taxable brokerage account. Low cost index funds are a great place to start if you want to self manage your investments, do so cheaply, and be well diversified.

Pay Attention to the Pillars

The takeaway here is that all of these are critical to your financial success and they all work together in various ways and throughout all stages of your life. Don’t get caught up in earning money but put off investing, and don’t let spending become the pillar you lean on while ignoring the rest. Financial stability, security and freedom are all derived from a solid understanding and implementation of these four ideas – pay attention to how they affect your life and use them to your advantage.


Questions? Advice to share? Let me know in the comments!

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