Using the Financial Planning Pyramid to Grow… or to Just Get Started!

Dr. Jay Zigmont, PhD, CFPR

When I began to get serious about my personal finances, I didn’t know where to even begin. I’d heard people talk about how important it was to have a budget, and I also heard people talking about 401ks, and I was told my student loans really needed to be paid off ASAP, and, oh, I needed health insurance too, and…

I was so overwhelmed. The hour long lesson in my “Welcome to College and Adult Life” class back at the start of my freshmen year was a haze (and is an hour really enough time to understand all this stuff?). I felt so unequipped and… dumb. That last part, feeling dumb, was the major problem because it made me ashamed to ask for the help I needed.

Fortunately, I stumbled upon a book (Rich Dad, Poor Dad – I know some of you have read it!) and that gave me enough curiosity and courage to get over my fear of looking dumb and start asking questions. This ultimately led me to a financial counselor and I learned about the Financial Planning Pyramid.

What I find so helpful about the Financial Planning Pyramid is that it offers a framework to gradually build a solid financial structure. You can work your way, brick by brick, toward building the full pyramid. Each of the bricks involves a few considerations.

Stabilize and Protect

The pyramid is built on a base that we call Stabilize and Protect. The base has three blocks: sufficient income, controlled spending, and suitable insurance.

Sufficient Income

The sufficient income block is laid when you earn enough money to pay for your living expenses. Some questions you can ask yourself are:

  • Do I understand each of the deductions that come out of my salary, and why my take-home pay is the amount it is?

  • If I’m not employed by someone else, do my gigs, and contract jobs provide a reliable amount of money on a regular basis?

  • Do I know how much money I need to earn to pay my necessary living expenses?

Controlled Spending

The controlled spending block is laid when you have a solid practice of not spending more than you earn. Some questions you can ask yourself are:

  • Do I know where my money goes each month?

  • Does my money go towards items, experiences, etc., that are meaningful to me?

  • Do I have a system for monitoring my spending and ensuring all of my bills are paid on time?

  • Is the amount of my debt decreasing every month?

Suitable Insurance

The suitable insurance block is laid when you have determined what types of insurance you need and you have obtained policies for each. Some questions you can ask yourself are:

  • Do I have health insurance and know the out-of-pocket costs associated, including the deductible, copays, and coinsurance?

  • Does my car insurance policy provide enough liability coverage

  • Do I understand what my renters’ insurance or homeowners insurance will cover if there is a natural disaster in the area?

  • If I am injured or get a serious illness and can’t work, do I have a disability policy in place that I understand?

  • If I suddenly pass away, is there enough money to take care of people who are relying on my income? If not, do I have a life insurance policy in place that I understand?

If you can confidently answer ‘yes’ to each of the questions above, then you can begin building on your base and move onto the Save and Prepare layer. If you can’t say a solid yes to these questions, I recommend taking the time to really work on them before moving up the pyramid. Otherwise you’ll have a shaky foundation. I find that people become particularly overwhelmed when laying the suitable insurance block because there are so many variables that must be accounted for when determining what kind of insurance you need and what an appropriate policy would look like. A financial planner is trained in insurance planning, so you can always reach out to us for help.

Save and Prepare

As you move up to the Save and Prepare layer, you’ll feel greater confidence now that you know what you are earning and spending, and that you have the insurance you need to cover major disasters. Next, you can focus on creating your emergency fund and retirement savings blocks.

Emergency Fund

An emergency fund is an essential component of your financial plan because it allows you to manage unforeseen situations that could otherwise devastate the pyramid you are trying to build. Some questions you can ask yourself are:

  • Do I have a savings account (not a checking account) that gives me a high annual percentage yield (APY)?

  • If I lost my job, do I have enough cash saved in that account to cover at least 6 months of living expenses?

  • Do I put aside money on a regular basis for sudden expenses that are likely to arise like car repairs, home repairs, veterinary expenses, and insurance deductibles?

Retirement Savings

There is a lot said about saving for retirement and this is a block that could take a lot of time to put in place. But, you may also be surprised to find this block is way easier to tackle than you originally expected. Some questions you can ask yourself are:

  • Do I have access to a retirement plan through work, such as a 401(k) or 403(b)? If I do, do I know how much my employer will match in contributions toward that account (if at all)?

  • If I don’t have access to a retirement plan through work, have I opened an Individual Retirement Account (IRA) or some other form of personal retirement account?

  • Do I contribute regularly to my retirement account?

  • Do I know if my accounts are Roth accounts or traditional accounts? And do I understand the effects of each on my income taxes both now and in the future?

  • Do I know how my money is invested inside my retirement accounts? Is it in stocks, bonds, mutual funds, or something else?

  • Am I taking enough risk with the investments inside my retirement account? Am I taking too much risk?

  • Have I run through a few scenarios on a retirement calculator to make sure I’m on a good track to have enough to meet my retirement goals? (Note: This is a question that you might find helpful to talk through with a financial planner who has access to technical financial planning software)

If you find yourself spending a lot of time on this layer before you can move up to Grow and Reach, that is totally fine! Some people spend many years assembling the blocks for this layer, so don’t feel pressure to rush yourself. Once you have a healthy emergency fund in place, and you have regular contributions going toward your future retirement, you can comfortably move onto investing outside of retirement.

Grow and Reach

Once you have a solid foundation, with savings for emergencies and a thoughtful retirement plan in place, you may be ready to explore investing outside of your retirement account. The Grow and Reach level is exciting because it’s where you get the opportunity to invest money in stocks, bonds, mutual funds, real estate, alternative assets, and more. This block is one that can look different over time as you become interested in different types of investments, and I encourage you to have some fun with it. Some questions to ask yourself to get the most out of this block are:

  • Do I have a taxable brokerage account where I can buy stocks, bonds, mutuals funds, and other securities?

  • Do I know how much I have to pay in fees for both the brokerage account, any management of the account, and the investments inside the account?

  • Do I know exactly what types of investments I have inside the brokerage account, and am I well-diversified?

  • Have I completed a risk tolerance survey and know how much risk I’m comfortable taking with my investments? Do my investments align with my risk tolerance?

  • Do I have a strategy in place for when to sell or buy investments so I don’t fall victim to rash decision-making?

  • Do I understand how my investments are taxed?

  • Do I have a goal tied to my investments that’s aligned with what is meaningful to me?

The Grow and Reach layer is both an exciting and scary place to be. There are times when your investment account will grow, and times when it will shrink. If you have arrived at this layer by building your foundation in Stabilize and Protect, and building your savings in Save and Prepare, then you will have a sturdy enough foundation in place to withstand the times that activity in the Grow and Reach layer can become scary. This is a great layer to work in with a financial planner who can not only help you consider which investments are most appropriate for you, but also be there to support you when markets are down.

Your Pyramid

While the pyramid is built brick by brick over time, it isn’t necessarily a linear process. As your life changes, you may find yourself needing to go back to the foundational layer and revisit your income, spending, and insurance. A sudden emergency may mean you need to return to building your emergency fund block. This is all normal and expected. What you’ll find over time is that you have the skills and knowledge to create the blocks, which means that each time life asks you to revisit them, you can do so faster and with more confidence.

And just remember, you can always ask for help!

Jay Zigmont, PhD, MBA, CFP® is the Founder of Childfree Wealth, a life and financial planning firm dedicated to helping Childfree and Permanently Childless people. Dr. Jay is a CERTIFIED FINANCIAL PLANNER™, Childfree Wealth Specialist, and author of the book “Portraits of Childfree Wealth.” Dr. Jay is the co-host of Childfree Wealth Podcast. His Ph.D. is in Adult Learning from the University of Connecticut.

He has been featured in Fortune, Forbes, MarketWatch, Wall Street Journal, New York Times, Business Insider, CNBC, and many other publications.