Financial Pyramid is an essential part of the financial planning process. I will try to outline the basic concept of theFinancial Pyramid as it applies to personal financial planning.
In order to understand the Financial Pyramid, it is very important to understand why is it named as Financial Pyramid. What is the speciality of the pyramid and its structure? A Pyramid has a stable, strong shape. The Egyptians built the pyramids in layers using stones. The first layer, or the base of the pyramid, contains the majority of stones and the largest stones. This makes it’s base very strong and gives a good foundation for building the other layers. Pyramids are the strongest structures because any added force is evenly spread through all three sides.
The Financial Pyramid
Similarly, the Personal financial planning pyramid relies on having a solid foundation of protection on which the rest of the pyramid is set up. It’s obvious that a building cannot be built overnight without laying a foundation. Financial Planning is a process and not a transaction. The basic rule of the pyramid is to start from the bottom and move up, rather than attempting to address all aspects of it at once. Hence, the first and the most important thing is having a very strong base and gradually progress towards other important aspects of the financial pyramid.
Proper financial planning takes into account the whole picture and not just a piece. Saving for retirement might be your current goal, but if you don’t have a plan for emergencies, that goal can get derailed in a second and kill any dreams of sipping margaritas on the beach. The whole idea is, if a person has not made his/her first layer of financial pyramid strong, then any uncertainties or emergencies can create a hole in your pocket. It is an emotional as well as a financial loss to the family; It becomes, even more, worse if the person happens to be the family’s bread-earner. Handling complex financial matters while coping with emotional stress can be traumatic. In such a situation, other levels of the financial pyramid are put on a toss, because the family struggles on non-discretionary expenses, and there is no question of savings and investment, and the other important aspects of life become unachievable.
Each layer of the pyramid is a broad topic and I will be discussing all these layers in a series in the subsequent articles!
