Financial Planning PyramidWhat level are YOU on?
- Protection: This stage one has to make provision for unexpected events, such as Debt Reduction, Replacement of Income, Death, Hospitalisation, Disability, Critical Illness, creating Emergency Fund (6 months of salary), Loss of Income.
- Savings & Wealth Accumulation: This stage helps you to start building your wealth and investments. This is the baby steps in creating your passive income sources. Investment options one can consider are Public provident Funds, Debt Mutual Funds, Bonds, buying house, Fixed interest Plans like Fixed deposits, Fixed Maturity plans, Gold.
- Growth and Diversification: This stage helps your wealth and investments achieve maximum growth and income. This may be your long term passive income sources. Investment options one can consider are Equity Mutual Funds, Stocks, and Portfolio Management services.
- 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. One can look into Real estate, Business, Art and Collectibles.
The pyramid illustrates which financial matters you should address first. As you move up the pyramid (by reducing debt and acquiring assets), your income protection needs are replaced by your need to accumulate more wealth. The opportunity for higher yields increases; however, risk also increases and liquidity reduces.
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.
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