The whole pyramid will be at risk, one small unexpected change can cause the whole pyramid to collapse. It makes so much sense! The 6 steps of financial planning are followed by fiduciary advisors and Certified Financial Planners to create recommendations and financial plans for their clients. Obviously, you should enlist the help of a Certified Financial Planner to help do this correctly. Insurance gives you the proper safety net that manages risk. Perhaps, the very reason that it existed for more than hundreds of years and up to now, is because of its very form. It can also provide for the kids. To create a strong foundation for your financial planning pyramid, you need to have protection from any unexpected event that can jeopardize your long-term financial goals. It may not be the most exciting aspect of financial planning, but it is certainly the most critical one. But to effectively proceed on this stage, you need to have completed the first steps, which covers the insurance protection requirements. Practice delayed gratification by postponing your purchase until you have reasonably contemplated on it or have saved up enough to make it possible. Speculation could range from buying speculative investments, like junior gold companies to investing in private partnerships. The idea behind the financial planning pyramid method is to build a good foundation. Would you build a house without a solid foundation? It doesn’t matter how beautiful the house is. Or I could look for other sources of income so I could set aside a higher percentage of my regular income into a savings account. You might also want to look into thrifting and second-hand shopping. 1. A regular financial check is vital to get an accurate picture and estimate how much you can save every period. It’s hard work, but it can be doable. The style and design look great though! This is a very informative article on the Financial Planning Basics. What’s a good foundation for a financial planning pyramid? You get buffeted around by whatever comes up. Personal Finance News. While most people don’t think of mortality, it is crucial that you handle this matter as soon as possible. My 6 Core Personal Financial Planning principles! Balance Sheet, Networth and Cashflow Statement. It can be very devastating for the surviving family. With this protection in play, your family’s lifestyle survives. Click on it to check out more details, or free download the original file to edit with built-in diagram design resources according to your own preferences. But in the long run, you’ll find yourself a whole lot better than when you started. They don’t just concentrate on paying off their debts or picking the right stocks. At the same time, work on paying off debts. 50 percent goes to the essentials, namely food, utilities, housing costs, etc. Without anything set aside for your financial protection, you open yourself to a lot of risks that can affect all your plans. Think of it as a marathon, not a sprint. Ones you have reached a level where your debt is low or zero, you have enough retirement funds and enough wealth accumulated in your investments you can start speculating. The financial planning pyramid is one of the most useful tools to make your plan, partly for its simple logic and partly for the ease with which it can be adapted to your personal circumstances. Hurry in building your savings so you can start with making investments. This widely accepted and simple tool can help you create a financial plan that is built on a solid foundation. Now that you’re making enough money while setting aside enough for your insurance and emergency fund, what’s next? For starters, check with your company’s benefits coordinator or HR department regarding retirement plans or similar options. The concept of a financial pyramid not only can help you prioritize financial goals, it also can make sure you aren’t exposed to unnecessary risks. Without money, lifestyle will be severely affected. At the first level of the pyramid, there are four stages that need to be considered. Building your wealth is a long-term strategy. This financial plan pyramid diagram template displays a series of different visually appealing financial asset management choices. Financial Planning Pyramid : Wealth Protection, Accumulation & Distribution; The 7 Most Important Personal Finance Ratios You Need To know! Speculation is very risky and only a very small portion of your assets should be invested in it, generally maximum of 5%. This is the stage where most people jump into, which shouldn’t be. Is that the french spelling of Summary btw? Again the important point to remember is that only a 5% of your assets should be in here. Here’s what you need to know about the financial planning pyramid system. Ideally, you should set aside 15 percent of your regular income and put it into a savings account. No matter how fantastic it looks, without a solid foundation, it will cave in. is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to ... health insurance and personal … haha thanks for noticing my impeccable spelling! Briefly, the Financial Pyramid is the basis upon which sound financial planning is based. Instead of focusing on singular financial problems, they set their eyes on a bigger objective. The financial planning pyramid method is a personal finance strategy that lets you have a good view of the whole picture and not just a fraction thereof. This fund can give you the peace of mind, knowing you have enough provisions for out-of-pocket costs that may arise from unexpected events. With insurance protection and an emergency fund in place, you won’t have to touch your savings to answer for the unexpected costs. These money saving tips can help you save hundreds. If you want to reap the most benefits, start investing. This foundation will cover the costs that you might incur without jeopardizing your finances. The Financial Planning Pyramid: Securing Your Financial Future There are three levels to a well constructed financial plan, starting with a solid foundation, which is designed to alleviate the effects of uncontrollable risks. One stage that is way to often forgotten and not seen as important is the protection stage in your financial pyramid. They are important, but perhaps I need to switch my focus for a few months and learn something new! Your email address will not be published. With savings in place, you also gain the confidence that lets you breathe easier, knowing you have the funds for whatever plans you may have. A good financial plan builds upon a solid foundation and enables you to reach your goals even in the face of life’s uncertainties. Understanding the Financial Pyramid is an essential part of understanding the financial planning process. It’s not only you; your family will also suffer. You should have a valid Will and POA’s as well as enough Emergency fund and Insurance to purchase a home and make comfortable contributions to your RRSP. Inflation will only eat up your money in a savings account. I will try to outline the basic concept of the Financial Pyramid as it applies to personal financial planning. As you work on your finances, think of building your wealth as a pyramid. The Financial Pyramid is a visual aid to help understand the necessarily steps to reaching financial freedom, just like a pyramid it has several layers starting from the base to the tip. With the finances changed drastically, the kids may not be able to complete school. This allows you to achieve your goals despite the economic uncertainties in life. Death of a breadwinner cuts off the family’s income source. Worse, death brings a whole new set of problems too. Here, we’ll take a look at the five levels of the Financial Planning Pyramid, starting at the bottom. The content is developed from sources believed to be providing accurate information. If you ask me, I’d like to have financial freedom as my big goal. Financial Planning Pyramid The first work week of 2012 and I hope it has been a great week so far for all. It may only be a matter of time when the family will beg for food. I’m not sure if this is a format issue or something to do with browser compatibility but I thought I’d post to let you know. Financial Planning is a dynamic process. Insuring against a risk that may or may not happen shows financial maturity. Why then build your financial house on a bad foundation? By eliminating most of the principal, you can stop the interest from accumulating too much. Some common items at this stage are: You should continue to this stage only and if only you have completed the first steps, otherwise your financial plan will be at risk. An emergency fund is your defense against events that aren’t usually covered by life, health, or any type of insurance. Choosing to ignore the reality of death or illness and its consequences is gravely irresponsible especially in today’s world. But accessibility is completely different from making your money grow. The planning process always starts with a base plan which is a written Personal Financial Plan. The purpose of the stage is to provide you with a cushion in case of an unexpected event such as job loss or health issues, if you do not have enough in emergency savings or insurance chances are that you will dig into your long-term savings which will undoubtedly jeopardize your long term goals. Have you created a sound Financial Plan incorporating all the above blocks of Financial Planning Pyramid? We need to be teaching this information on our schools because it’s never to early to become financially independent. Good foundation is the bare minimum for a good financial planning. I’ll assume no. Enter the Financial Planning Pyramid. Yes, some get lucky and will never experience a catastrophe. She loves teaching other moms how to save money, make money, and take control of their financial situation. Learn these financial planning steps and improve your personal finances. © 2019 MMC Media LLC You may have seen her in publications like Forbes, The US Chamber of Commerce, Yahoo Finance,, The Penny Hoarder, & more. The tiers of the financial pyramid demonstrate our underlying philosophy for developing a solid financial strategy. Strengthen your financial position Build emergency reserves of three to six months of lifestyle needs. Perhaps the next year, you will go for 16 percent or more. The purpose here is to start building your wealth and investments, it’s the first stage at the journey to financial freedom. Howdy just wanted to give you a quick heads up. Have you started on your financial planning today? Death or illness will cause little to no major financial hit. Having said that, savings is the level where you begin the first part of your journey toward building your wealth. Compare Personal Loans Shop and Compare for Best Rates Get Started Now Building a Personal Financial Pyramid: An “All In One” Plan Americans generally do a good job addressing their household financial needs, especially with the three primary household finance tentpoles – investing, personal finance/budgeting, and debt reduction. It’s a personal finance strategy that lets you have a good view of the whole picture and not just one piece of the pie. 5 Personal Financial Mistakes that I have committed…! Your email address will not be published. It will catch you should an unforeseen or inevitable catastrophic event occurs. Your email address will not be published. Many people do not insure against catastrophe. The Pyramid's Base: Setting and Prioritizing Your Financial Goals You know how it is when you don't start a day with a to-do list? They justify it by saying, “ I don’t get … Every year, increase it up a notch. This professionally-designed deck illustrates the pyramids demonstrating the relationship between the level of risk and the potential return on investment. These steps can also be learned and applied by individuals for their own benefit. You don’t have to dig deep into your savings or incur debts. You can put me down as another person that’s missing Level 1… I will stop procrastinating on this soon. Also, you may want to speak with financial advisors regarding asset management or other investment programs. A plan acts as a guide through your financial journey and, even if domestic and global upheavals dent your investments, it will help you get back on track. A plan, a process, and a professional are the building blocks of your financial pyramid. Another good protection against a potentially jeopardizing occurrence may come in the form of setting aside a certain percentage of your income and putting it in an emergency fund. This can be as detailed and complicated or as simple as you want it to be, it generally starts of fairly simple and develops overtime in a more complex plan. You need to budget your money, keeping track of your spending while ensuring a steady flow of income. At the macro level, planning affects every aspect of personal finance, be it taxation, insurance or achievement of goals. Continue reading: List of Articles on the key Components of Personal Financial Planning; The importance of numeracy in becoming Financially Literate! It’s an extension to the second level, ones you have become a home owner and have adequately funded your RRSP’s and TFSA accounts you can start building non-registered investment portfolio’s. This pyramid guides how we help you be wise with money by optimizing your income to help protect what’s important to you. The earlier you begin, the better. Please consult with an investment professional before you invest your money. The financial pyramid is the main part of the Financial Planning Process. This site is for entertainment purposes only - any opinion here should not be treated as an investment advice. It will protect you and your family from the out-of-pocket expenses that may arise from these unfortunate events. I will try to outline the basic concept of the Financial Pyramid as it applies to personal financial planning.. To build your wealth, you need to have savings. Learn the Hierarchy of Financial Needs: The Financial Pyramid Egypt’s pyramids, are one of the oldest structures of the world. Building and preserving your wealth is an extension to setting aside money as savings. As you can see, from the illustration, it is located at the bottom of the financial pyramid and is a large part of the pyramid, what happens if its too small or too loose? And the only way to prepare for the worst case scenarios is to have more protection; be it insurance or some other form of risk management. Pyramid is one of the most stable structure on earth; the Financial Planning Pyramid is symbolic to a sound and stable financial plan. This is the third post on the Financial Planning Basics series, if you have not read the last post click here. Everything could crumble should an unexpected event occur. More importantly, you and your family will continue your current lifestyle. I love your pyramid comparison. Under no circumstances should any information from this blog be used as replacement for professional medical, financial, or legal advice. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. If you want to create more wealth, focus on reducing your discretionary spending. Ideally, you should have at least three to six months worth of income in an emergency fund. Each is a vital component which can help you reach your financial goals. Start with this rate, but challenge yourself by increasing it further every year. Insurance gives you the cushion in case of an emergency or unanticipated events like job loss or medical issues. Get a big picture of where you are in your finances at the moment with the financial planning pyramid method. Think of it as a map for a road trip, it will guide you to your destination. The less stuff you have, the more affordable living can be. Use our Financial Planning Pyramid PPT template as a visual aid to help your intended audience understand the necessary steps to achieve financial freedom, effectively. Also, the earlier you start making investments, the better. Take a look at this financial pyramid to understand planning finances better. Sell or dispose of it. To do this, simply spend significantly less. 20 percent is the amount that goes into your savings account. It does not make a lot of financial sense to have a taxable investment portfolio if your tax deferred (RRSP) and tax free (TFSA) accounts have contribution room. Using the six-level pyramid to help explain the various building blocks to financial success helps to reveal the development of financial planning and indications, at each level, if instruments that might be considered. Check the background of your financial professional on FINRA's BrokerCheck. The financial pyramid starts with a base foundation, which is a written financial plan. This is a wonderful read! And now that you’ve started to accumulate more wealth, what’s next? The money in your bank savings right now will have less than 50 percent of its purchasing power in 20 or so years. Secrets to Your Personal Financial Success Thursday, 5 January 2012. Perhaps buy a car and a home as well as invest in your kid’s college fund. Building your wealth requires discipline and perseverance. Will you risk losing everything in a disaster? What good are your income-generating systems and insurance protection if you can’t keep with a sound financial management system. Did you know successful people take this unique approach to building a good financial plan? She has started five profitable businesses and in college, she double-majored in Financial Planning and Psychology. If you want to build your wealth and make sure it lasts, you need a sound long-term strategy. If you climb the financial pyramid in the specific order and one level at a time you will have a solid financial plan and be able to weather short periods of financial hardship without jeopardizing long term goals. Ideally, set aside about 15 percent of your income to build your savings. Without a solid foundation, it does not matter how awesome the house is, it will eventually collapse. Thanks for sharing such great post, according to me Our financial life planning is also the same as football, there are so many similarities like never give up, have patience, try another goal, etc. Don’t fret if it’s not been good because it’s the beginning of the weekends soon! Required fields are marked *. Insurance gives you the protection you need against unexpected events like job loss or medical issues. Here’s what you need to know about it. If you’re not sure how to plan ahead, take a look at the Financial Planning Pyramid. ˜e Personal Finance Pyramid Now, to this point, we’ve focused purely on investing. It takes many steps, and you’ll likely see little progress. Having a good base is crucial to financial planning. And to create a strong pyramid, you need to establish a solid base; a sturdy foundation that will carry the other levels. To meet your higher-level needs, you need to satisfy your basic-level needs. Even millionaires have a hard time trimming expenses down to a minimum and working on a tight budget. The planning process always starts with a base plan which is a written Personal Financial Plan. If you want to create a solid foundation for your financial planning pyramid, you should first focus on your protection level. The last stage in the financial pyramid is the distribution phase. You can now focus on this since you have the necessary protection from any eventuality like job loss or medical issues. Even if you can only put in $50 or so each month, that can go a long way. Things that usually belong in your written financial plan are: This is the base of the pyramid and the foundation of your financial plan, this will be your guide throughout the next few decades and will be updated as your situation changes. Rather, they devote themselves to the big goal. The financial pyramid is the main part of the Financial Planning Process. The words in your content seem to be running off the screen in Ie. You may also want to concentrate on retirement planning at this stage. On the other hand, serious illness of a breadwinner will not only cut the income stream; the family will also have to incur out-of-pocket costs to answer for the medical needs. Without a solid foundation, it will collapse. Keeping your savings in the bank is only good when you need to get hold of money fast. And it follows that the premiums they paid constitute money that they will never get back. McKinzie is a mom of two, and a personal finance enthusiast. Also, downsize your home or car to lower your expenses on these items. Disclaimer: All content on this site is written for informational purposes only. is owned by MMC Media, LLC and neither are licensed by or affiliated with any third-party marks on this website and third parties do not endorse, authorize, or sponsor our content except where clearly disclosed. Are you looking to buy an expensive item? Financial Planning Pyramid It’s important to plan for your financial future. To achieve your savings target, reassess your cash flow. Without ample fund for emergencies, catastrophes will have you digging into your long-term savings and potentially depleting it; worse, you will incur debts. Please consult legal or tax professionals for specific information regarding your individual situation. It’s important to preserve it. For you and your family’s financial security, you need to secure life and health insurance protection. The common justification is that it is money they don’t get back. The best way to make your money grow is to enter into investments. This may be easier said than done. The three most important considerations to remember when building a solid foundation in your financial planning pyramid chart are: This is the most vital component in a financial risk pyramid. Understanding the financial pyramid is an important part of financial planning, it is also a good way to visualize the importance of certain stages. Cheers, Your email address will not be published. Have savings for retirement and enough funds for emergencies. The most infamous of these are the classic Ponzi schemes used to bilk millions of dollars from the unsuspecting over the years. Hope you get the problem solved soon. The problem Once you’ve determined the amount of your necessary monthly expenses, you’ll have a good idea of how much to set aside as savings. The earlier you secure a life or health insurance coverage, the cheaper it is. The information in this material is not intended as tax or legal advice. Successfully managing your personal finances and building wealth is a challenging endeavor, but the financial planning pyramid provides a guideline for what actions need to be taken, and in what order to build a life of financial freedom and pass it along to the next generation. Past performance is not a guarantee of future performance. In financial terms, the word “pyramid” has often been linked to dangerous and illegal schemes. Tags : financial planning. =). 30 percent is discretionary spending, which includes phone and cable subscriptions, entertainment and amusement experiences, vacations, etc. The most fundamental needs are at the base of the financial pyramid. I’m all about having a cash emergency fund/safety net, but having money in cash actually loses you money since you aren’t gaining any interest to combat inflation. For example, if you haven’t completed the insurance steps at level 2 to make sure that you and anyone who relies on your income are protected if you become disabled or pass away unexpectedly, it’s not a good idea to buy a house (level 3). Either way thanks for sharing! This stage is a very crucial stage in planning and usually includes the following items: In many cases when I talk to individuals and families about their financial plan this stage is either missing or incomplete in their financial plan, however without appropriate protection your whole financial plan is at risk. If you ask me, I’d like to achieve a 50-percent savings rate in the near future. It’s all downhill from there. Well, it depends. We see more people that don’t have a distribution plan in place and end up giving too much money to the Internal Revenue Service or a Long Term Care Facility. But here’s an unfortunate reality. To do that, I will just have to limit my spending. This is where you let your finances grow further. The most important thing to remember in the foundation of finance is Insurance, Insurance, and more Insurance. Yes, asset allocation is so important. The insurance proceeds can pay off any debts left behind. Think of your financial planning pyramid as a house. Paying off your debts is also a good investment to undertake. What’s the next layer in a financial pyramid? We are not liable for any losses suffered by any party because of recommendations published on this blog. Minimalism offers a psychologically freeing feeling. Thanks for the reminder about not becoming a millionaire through savings accounts too. Understanding the Financial Pyramid is an essential part of understanding the financial planning process. To preserve the wealth you’ve built, you need to stick to a budget. Our firm will guide you through the construction of your financial pyramid; giving you what we believe to be the resources, tools and understanding needed for success. It is on this level that you pursue efforts toward building more wealth. by Ray | Financial Planning, Financial Planning Basics Guide, General Finance, Insurance, Investing, Retirement | 5 comments. Required fields are marked *, Notify me of followup comments via e-mail, Designed by Elegant Themes | Powered by WordPress. Let me first share the essential pieces that leads to the Financial Planning Building Blocks. Share your thoughts. This is the stage where most people start their financial plan, it’s the savings stage. Can you imagine being in a family where the breadwinner dies? But are you willing to take that chance? Now that you have created a good foundation for your financial health, it’s time to progress by becoming wealthier. Here is the pyramid: Let’s go into these three main levels in the financial planning pyramid. These numbers are percentages of where your money goes every month. I cannot stress this enough. To know more about the various facets of financial planning and money management, read on. Financial Planning Basics- Guide To Financial Planning. Download Image. The next level of the financial planning pyramid is wealth building and preservation. A lot of people don’t insure against eventualities. But for many people, the impact of personal finance choices swamps that of investment choices in the short run (I am of the opinion that the vast majority of people should spend near zero time on their investments). Thanks again! Make an honest appraisal of the money that comes in versus the amount that comes out every month. My personal goal is to eventually save up to 50 percent of my income. This personal finance pyramid follows Maslow’s theory. Insurance gives you the cushion, which absorbs the blow from unexpected events. This is a follow-up to the second level of the financial pyramid, which is savings. Proper planning can help minimize the interests of others and help maximize your family interests. It is not a one time activity. Make investments today to reap its benefits tomorrow.