Finance 101: The Financial Pyramid
What is the Financial Pyramid?
Briefly, the Financial Pyramid is the basis upon which sound financial planning is based.
In financial terms, the word “pyramid” has often been linked to dangerous and illegal schemes. The most infamous of these are the classic Ponzi schemes used to bilk millions of dollars from the unsuspecting over the years. However, there is a good financial pyramid upon which to base your financial planning.
Why use the Financial Pyramid approach?
A pyramid is the strongest and most sturdy of structures in architecture. In addition, it is a familiar shape, showing the priority of lower levels in supporting the higher levels.
We are all familiar with various pyramids used to show priorities in building upon lower levels to advance to higher levels. Two of the more common uses are the Food Pyramid used by nutritionists and Abram Maslow’s Hierarchy of Needs used in classical psychology. In fact, the Financial Pyramid is based closely on the Maslowian approach to human actualization in that basic needs must be met first before advancing to higher levels of existence. For example, a person unable to provide basic nutrition for themselves will find it difficult, if not impossible, to have any concern for their safety or to advance to the higher levels of relationships or achieving their dreams of going to school to enter the career of their dreams. In financial planning, the same holds true. Investing in individual stocks or oil and grain futures should not precede provision against catastrophic life events or paying off credit cards.
What does the Financial Pyramid look like?
How do I apply the Financial Pyramid to my life?
To start with, build the base. A financial plan is crucial to your future financial success. It doesn’t matter how much money you may or may not have, whatever you do have needs to be used in a plan. And whatever you do have needs to be protected first before doing anything else. Failing to plan means planning to fail. It’s that simple.
A builder preparing to construct a home would not walk out to the job site and start shingling a roof. He would consult the blueprints, pour a foundation, and construct the frame of the building. In the same way, individual and business finances need to be planned in some way, and the plan must be implemented. It may not be possible to put together the entire plan to start. In fact, it may be necessary to focus on only one or two items at a time before moving on to others. However, the ultimate goal of financial freedom can be reached. The best way is to work with an experienced and conscientious financial advisor to help you along the way. Future issues will go over the tools you can use daily in managing your finances and what you should expect and even demand from your financial advisor.
Is this a little bit daunting? Probably, but remember, the way to eat an elephant, just like a turkey, is still one bite at a time. Starting with little steps will set you off on a sound plan.
© 2008, Monday Hope Financial Services
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