Sunday, July 22, 2012

Financial Pyramid: In which level are you today?

Maslow's Pyramid of Needs. Credits: Wkipedia
 
Maslow's hierarchy of needs interprets human's basic needs as the foundation of the pyramid and gradually elevates to the levels that human motivations generally move through -- safety, love/belonging, esteem and self actualization.

"For the most part, physiological needs are obvious – they are the literal requirements for human survival. If these requirements are not met, the human body simply cannot continue to function."



In the same way, Financial Planning also has a Financial Pyramid. It is a strategic approach in managing investment portfolio where the base of the pyramid is made up of low-risk investments, the mid-portion is composed of growth investments and the top is speculative investments.

For the most part, the base of the pyramid forms the requirements and foundation of a solid financial plan as well as for a long term financial freedom goal. Similar to meeting the physiological needs, if the basic financial requirements are not met, the plan for financial freedom simply cannot continue be achieved.


The 4 levels of Financial Pyramid:
  1. Protection
    This stage provides you with a cushion in case of unexpected events, such as job loss or health issues. Items you need to have in this stage:
       -- Savings, Emergency Fund (6 months of salary)
       -- Insurance (Life, Health, Critical Illness, etc)
  2. Savings
    This stage helps you to start building your wealth and investments. This is the baby steps in creating your passive income sources. Items you need to have in this stage:
       -- Mutual Funds, Bonds
       -- Real Estate / Your Home
  3. Wealth Building
    This stage helps your wealth and investments achieve maximum growth and income. This may be your long term passive income sources. Items you need to have in this stage:
       -- Equity, Stocks
       -- Business
  4. Speculation
    At this stage, you should have excess funds with zero or low debt, enough retirement and investment fund before investing in a much higher risk portfolio. Some items in speculation would be:
       -- Gold
    Success: one step at a time
    Success. One step at a time. Credits: deZengo

       -- Art, Collectibles
The financial pyramid enables us to understand the importance of each stage in order for us to visualize our road to financial freedom. It is also important to note that it is ideal to go one step at a time for each level in your financial plan to achieve success.











Understanding financial pyramid: