Financial Planning Pyramid
A financial planning pyramid can help you organize and prioritize your monetary goals and needs. Discover more about the tool here.
Financial planning pyramids organize and prioritize monetary goals.
The base layer of the pyramid covers fundamental financial needs.
The top layer focuses on higher risk/higher reward investments.
Financial planning pyramids can help you reduce and eliminate debt.
A financial advisor can help you to build your pyramid successfully.
What is a financial planning pyramid?
A financial planning pyramid is a conceptual tool used in the finance industry to organize and prioritize a set of monetary goals and needs. The pyramid serves as a visual cue for understanding the hierarchical nature of financial priorities, making it easier to reach financial goals and targets.
Creating a personal financial planning pyramid is a great way to get your financial affairs in order. It also empowers you to follow a more consistent and informed trajectory of financial growth.
There are several layers to building a financial planning pyramid, starting with the most fundamental needs at the base layer (such as emergency funds) and gradually working up to supplementary needs, such as investments. This guide focuses on the following layers:
Protection and insurance
Stable, low-risk investments
High-risk, high-yield investments
By understanding more about financial planning pyramids and how to use them, you can construct a comprehensive financial plan that’s tailored to your exact needs, budget, and personal goals.
What are the different layers of the financial planning pyramid?
There are four main levels to a financial planning pyramid. Each one represents a different tier of financial progress or growth, starting with foundational tiers that secure your baseline financial needs and progressing upwards to speculative activities that facilitate growth on a larger scale.
The idea behind a personal financial planning pyramid is that it illustrates which financial matters you should focus on most, working through your needs one by one in order of priority.
As you ascend the pyramid, your debt reduces, and your assets grow, helping you to accumulate wealth more consistently and stably.
Layer 1: Protection/insurance
The first and most foundational layer of a strong personal financial planning pyramid pertains to basic financial security. Every sound financial plan must be rooted firmly in accessible liquidity and protection against unexpected crises or damages.
Emergency funds for a sudden loss of income, unexpected repairs, medical emergencies, etc.
Insurance for health, auto, property, life, disability, long-term care, retirement
Before you can focus on growing your wealth, you need basic financial security, and that is what these protective varieties of insurance and emergency funds can provide.
Layer 2: Management of debt
Over 340 million Americans carry some form of debt, many of whom won’t be able to pay it off in their lifetimes. However, by taking personal debt management seriously and committing to a robust repayment plan, you can achieve financial freedom.
Addressing the following common debts is a core element of any functional financial planning pyramid:
Even the most insurmountable debt can be eliminated with a personally tailored repayment plan and a clearer understanding of your finances. Both of these are made easier through the use of a personal financial planning pyramid.
Layer 3: Investments for financial stability
Investments for financial stability, also known as core investments, are low-risk investments that focus on stable outcomes and diversification for the sake of consistent wealth generation over time. Looking into safe investment options is a great way to ascertain more financial security. Some options include:
For those who are new to investments or want to exercise more financial caution, a low-risk investment is always a good place to start.
Layer 4: Speculative investments
A speculative investment is an investment that carries a high level of risk and a high potential for reward. Once you have achieved a sound level of financial security, you will be in a better position to make high-risk, high-reward investments that offer greater potential returns, such as:
Foreign exchange (Forex) trading
Emerging market stocks
While they are an excellent addition to your portfolio, speculative investments are reserved for the pinnacle of the financial planning pyramid because they are only viable when you have a robust financial cushion to fall back on. The more experience you gain with high-risk investments, the more financially savvy and prosperous you can become.
Need advice on your financial planning?
Building a financial pyramid for financial planning can be stressful, but only when you go at it alone. Obtaining the help and guidance of a financial advisor is one of the best ways to create a personalized financial plan that works for your budget, income, and projected financial targets.
Working with an SEC-regulated, qualified financial advisor is crucial for effective financial planning. Get matched with an advisor from Unbiased today to start building your pyramid and expedite your financial growth trajectory.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.