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April is national financial literacy month, so we are going back to basics in Your Mind on Money this month. I understand financial concepts can be intimidating, and in fact some truly are, but for the vast majority of Americans, personal finance does not have to be complicated.

I think using analogies associated with fitness and diet when discussing the basics of behavioral — aka personal — finance just make sense. Like the government-developed “food pyramid” most of us are familiar with from health class in school (although I think its been retired now), certain behaviors and milestones serve as the foundation of financial health as well.

I like talking about the process of pursuing financial independence in the context of a pyramid of behaviors (no, not a pyramid scheme), each sequential behavior building on the foundation of the prior. Using this logic, no sequential behavior can be skipped, as the foundation of the next behavior will simply not be solid and sustainable. I often tell people I’m speaking to, it doesn’t matter if you accomplish the foundational steps of the pyramid when you are 20, 40, or 60, eventually you will have to do them in order to achieve financial true independence.

The first level of the pyramid is to accumulate an emergency fund of at least $2,000. This emergency fund should be stored in a liquid account, but not the checking account, at a bank. The account should be accessible, but not easily accessible. I like using a savings account attached to my checking account, but I don’t want to have a debit card or checks on my emergency fund account.

The emergency fund is not to be invested, not even in a CD. Yes, I know it won’t earn any money, but that’s OK. The emergency fund should also be accumulated even if you still owe money on credit cards or student loans. Reducing debt is higher on the pyramid and having debt does not get you out of this foundational step.

The second foundational step is to work to accumulate six months of typical monthly household expenses. Some planners will suggest saving six months of income, but as this step is designed to serve as a “super” emergency fund, I like using base expenses. I hope that if a true emergency such as a medical situation or unemployment arises, we can probably carve out some of the luxury items (like lattes and dining out) and batten down the hatches. For most households in Northwest Indiana I think this fund should ultimately be $20,000 to $35,000.

Yes, I know it could take years to accomplish this step; that’s OK as well. Once again, having debt does not preclude a family from doing this step. This super emergency fund should be stored separately from the emergency fund and the checking account, it should not be invested, but a portion can be put in a shorter term CD.

After these foundational steps, now we can start aggressively paying down debt and saving and investing for long-term goals. The one exception to these steps is that I can embrace contributing to a 401(k) or employer-sponsored retirement plan that offers an employer match while we are still working on steps one and two. A match represents “free money” that usually shouldn’t be passed up.

Next week we will address steps three and four, which are paying down debt and investing for longer term goals.

And as a reminder, I will be hosting the final show of “Money on Call” on Channel 56 the Lakeshore from 7 to 7:30 p.m. Friday, April 26. We will be discussing retirement strategies. Please tune in, or call in with your questions.

Opinions are solely the writer's and are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing involves risk, including loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial.  Contact Marc at marc.ruiz@oakpartners.com Securities offered through LPL Financial, member FINRA/SIPC.

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