What first comes to mind at the mention of a financial pyramid? For me, my mind immediately went to pyramid schemes. Just in case you are like how I used to be, I’ll do my best in breaking down what the financial pyramid is, and how you can identify your needs with the financial pyramid.
What is the Financial Pyramid?
A financial pyramid is a risk structure that spreads an investor’s risk across low-risk, medium-risk and high-risk ventures. So, you know how your typical pyramid looks like, broad base, pointed narrow top? Yes, that is how the financial pyramid is set up with the bulk of your investment assets being the base. This is to guarantee a level of safety for your assets, as the base of a financial pyramid provides predictable returns.
What are the levels of the Financial Pyramid?
While a lot of people want to create and accumulate wealth for their retirement, they forget there is a strategy you can follow to achieve it. Developing a financial planning pyramid will help you take into consideration various risks and emergencies you would not typically consider.
Let us keep in mind that the success of your financial pyramids are deeply rooted in how solid the foundation of your pyramids are; a weak foundation will can lead to a crumbled pyramid and vice verse. Let us take a look at the levels that make up the financial planning pyramid:
- Cash Flow: Cash flow makes the base the financial pyramid. Like a computer system, you can only give out what is fed into the system. For instance, if your net monthly income is $50, you can only spend $50 (unless you want accumulate debt, bad idea). A proper assessment of your cash flow and expenses will show you the best way to distribute your income, how much you save, and how much you invest. When you have knowledge of your earnings and investments, you can move to the next level of the pyramid.
- Risk Management: This is how you protect your investments and cushion adverse effects on those investments. Risk management involves insurance planning. This is not very exciting for a lot of people; however, it is necessary for you to have cushions to break your fall in the events of a crash. You should consider health insurance, auto insurance, homeowner insurance, and life insurance, in case of any emergencies relating to your health, vehicles or home. For life insurance, your family would be protected from the consequences your death would cause. Your child or spouse wouldn’t have to sell off valuable property to keep sustaining themselves.
- Investing: While it is a wise decision to save part of your income, investing part of it is just as important. You should have a goal of saving up a particular amount for retirement, but you should also consider setting “sub-goals” that will enable you to save for other things such as a child’s college tuition, a car, or a new home. Additionally, consider setting investing goals. Now, you can create an investment account that will help you meet your savings goals, but do not just use your investments to fund expenses. Investments are there to accumulate wealth, not to spend regularly. An investment account can be any fixed deposit account with promises of interest on the money saved. You can also invest in ventures you believe will bring you decent profits in a short time; these ventures should have a medium amount of risk. Examples of such ventures are investing in index funds, investing in dividend producing stocks, or real estate crowdfunding.
- Tax planning: This is the fourth level of the financial planning pyramid. When planning for retirement savings, you should think about taxes and prepare for them. You can take advantage of the tax advantages of the IRAs and 401(k). However, you can consider other investment plans, depending on how much you earn. There are investment packages that would let you not pay tax on your earnings. An example is a municipal bond. NB: it is best practice to consult a tax adviser before you opt for any tax plans.
- Estate Planning: Planning estate isn’t something a lot of people like to think about; some people detest the idea of dying. However, this is something that will happen to every one of us. In the wake of your demise, you do not want to leave your estate unplanned and at the mercy of the government. At the very least, everyone should have a will that declares their basic personal and business wishes.
Identifying Your Financial Needs With The Pyramid
When accessing your financial needs, you can use the financial pyramid. All you need to do is draw your financial pyramid, taking into consideration your assets, your liabilities, investment, and securities. You will know your basic needs that are yet to be met from how solid the base of your pyramid is; a strong base will be an indication that your basic needs are already fulfilled and a weak base will mean they are not.
When you move to the subsequent steps of the pyramid, access what you have on such levels and what you lack. Doing so will help you realize what your needs are and what they are not.
So, get started today! Write up your financial pyramid and start your journey to financial independence. Comment below with any questions you may have. Remember, have a little fun while you are creating your financial pyramid. Finance shouldn’t be all doom and gloom because assessing your finances can help you determine your path to freedom. Cheers!