The process of financial planning provides a holistic and dynamic approach towards achieving your financial goals.
A lot of people are actually not aware that when it comes to financial planning, there are truly a few stages involved.
Most of the people are in such a hurry planning for their finances to literally skip different stages that need to be followed sequentially.
At the end of the day, they realize that their financial planning foundation is not well set; everything might actually crumble after some time.
Financial planning is yet another important function which every person must perform.
It is achievable to manage your finances more effectively through a defined plan. This can simply be done by creating a well thought formula.
To better understand and appreciate financial planning, it is very important to get the hang of the stages involved using a framework called financial planning pyramid.
So, what is the financial planning pyramid?
The Maslow’s hierarchy of needs is a theory in psychology that illustrates a pyramid; from the bottom as the foundation of basic human needs going up the ladder to other human needs.
According to the theory, people are motivated to fulfil their needs in a hierarchical order from the most basic needs moving on to more advanced needs.
The financial planning pyramid goes the same concept. It starts with the basic financial need that sets the foundation of the pyramid as you move up the pyramid.
The base of your financial planning pyramid needs to be a rock-hard plan. Mostly, it should constitute financial matters that you should address first.
This includes;
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Well written budget -
Insurance needs -
Debt reduction -
Emergency fund etc.
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On the pyramid, you should make sure the bottom of the pyramid (the base) is stronger and the widest. Because, this is where your protection products should be.
Importance of understanding financial planning pyramid
Financial planning is a lifelong journey.
We choose to model our financial planning based on the pyramid because, the higher you want to go with your finances the wider you must go.
By this, it means that the higher glamorous expected returns from your goals; you need an equivalent secured base. You must protect yourself from the unthinkable.
Some of the financial necessities that need to be sorted out are like; insurance needs, building an emergency fund, securing a steady income, paying off your debts etc.
The pyramid model allows you to view financial planning in terms of priority or stages.
The financial planning pyramid serves as a guide for you to understand your financial condition and assess your financial health.
It also helps you to lay the right financial ground work with which to build your future on.
How it can help you with your situations.
Financial planning pyramid is important because it will lead you to be satisfied with your personal life.
Financial planning is not just about having a saving plan or a financial product/service.
It is about mapping out the most important things that encompasses your financials. By following through a process or a pathway to ensure you get to the intended destination with your finances.
Most people have a financial planning pyramid with a very small base and with a lot of risks.
For example, when something happens to the economy or the stock market, they will tend to lose not only their money but also the time to make their money back.
Why you should follow the pyramid sequence.
One of the most important parts of financial management is understanding the concept of financial planning pyramid.
The main point from the financial planning pyramid concept is that, you are motivated first and foremost by basic needs.
After satisfying those needs, you will move on to the next stage following the same sequence until you reach the top of the pyramid
Why is it so important to actually follow the different steps?
Following the financial planning pyramid and ticking things off in order will ensure that you are as prepared as you can be with your finances.
For years, financial advisors have used the pyramid concept to help make complicated financial strategies simple.
They would start with the conservative topics at the bottom of the pyramid and work their way to the top which will represent more risky strategies.
Key takeaway
Financial planning Pyramid is one of the ways of managing your personal finances.
The essential foundation of developing a strong financial planning pyramid is to start from the bottom and move up, instead of attempting to tackle all aspects of your finances at once.
To gain your financial freedom, financial planning pyramid is one of the concepts you need to learn and master well.
All in all start by creating a wider and strong base.