Financial Planning Pyramid
The answer if you don't know where to begin planning
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. Here is the pyramid:
The financial planning pyramid is used from the bottom
to the top, keeping in mind that as you rise higher in the
pyramid both risk and potential profits increase.
Levels of the financial planning pyramid
The three levels of the pyramid are:
This is the stage where you cover the most basic risks which
could affect you beginning with:
- Unavoidable risks (death, sickness, accidents, etc.) of
which you can normally cover with insurance policies and wills.
Another unavoidable risk which we looked at before in this article, is the fact that you could be without
work or income (if you're self-employed), so in your
particular situation you may want to consider the possibility
of having an extra source of income to assure you financial
- Within the likely risks, the most important are the debts
you now have or those which you are assuming day by day. For
these your plan should include the reduction of these debts if
they are now, or likely to be a problem in the future.
Once you're protected and according to your objectives and
your risk profile (how comfortable you are taking risks) you
can begin to accumulate wealth through:
- Savings, creating funds for events such as your retirement,
emergencies, you and your children's education.
- Building your investments using such investment vehicles
as: bonds, shares, mutual funds, exchange traded funds (ETF),
- Speculation with other kinds of investments with higher
risk such as: futures, commodities, real estate, foreign
This stage concerns the gratifying task of passing on the
fruits of your labor to your loved ones or whoever you wish in
an effective manner, taking into account the unavoidable risk
of your death.
It is important to plan this aspect because, depending on the
country where you live, inheritance taxes and procedures can
greatly reduce what's left of what you dedicated your life to
build for your heirs.
Taxes and your financial planning pyramid
As you can see in the preceding illustration, tax planning
should be part of every moment of your general plan.
This is because taxes often affect most of the activities and
transactions which you make in spite of the insurance you have,
the retirement plans you choose, the investment vehicles you
use and the estate plans you make.
In addition, you must always remember that the higher you are
in your financial planning pyramid, the risk is greater, and
even more so if you are lacking in financial knowledge and you
either don't have the time or don't wish to undertake to learn
For this, as you progress you'll repeatedly face the need to
seek professional help to assist you in making decisions, which,
in my opinion, is one of the best decisions you could make.
Additionally, to assist your tax planning there are some great online software programs available from companies like Turbo Tax and H&R Block. Turbo Tax even has a new Turbo Tax Military Edition.
Applying what we've learned to your case
To apply what we've just seen to your own situation you can
use the answers to the following questions:
1. If you write down all you now have (insurance, retirement
plan, investments, etc.) and you compare this to the financial
planning pyramid -- which level are you on?
2. Can you say that you have adequately covered the base of the
pyramid (Protection) before going to the next level?
3. Are there areas that still need attention? What are
If you have questions of a general nature, feel free to Contact us.
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