Financial planning pyramid

Let's have a look how easy it is to plan your financial. It's as easy as 1, 2, 3 steps.

See, it's very simple right? Am I right? If you can follow this pyramid, you will be good financially.

Step 1: The base is PROTECTION.
As you all know, not all of us are born with a silver or golden spoon. We have to start everything by ourself from the bottom. We start working and save little by little to try build up our savings and then have more money to be invested and to grow that money. Thus the importance of protection. You MUST have insurance to make sure that your hard earned savings will not be lost or wiped out by any unfortunate events, such as getting sick and hospitalised, getting into accident and you are disabled and can't work, diagnosed with critical illness such as cancer and need expensive treatment, etc. You cannot afford not to have insurance!! Make sure you have huge and comprehensive coverage. Also do not forget to have at least 6 months of cash emergency funds for any unexpected expenses.

Step 2: The middle is SAVINGS & ACCUMULATION.
Please go back to step 1 if you have not done it. Only once you secured the step 1, you can efficiently do step 2. Here we want to start having some basic savings. You can have a savings account to handle all your daily cash needs and deposits account for your long term goals. Then you can start to set aside funds for any goals that you want, be it home ownership, education for your kids, vacations, cars, retirement and etc. You can also start endowment plans to achieve these goals.

Step 3: The top is GROWTH.
Once you have set up your basic savings/deposits accounts in step 2 and you have saved a good enough amount, you can start to be more adventurous. Set aside some money from your savings/deposits and put it into any investment vehicles that you know and understand and you believe have a good potential return in the future. It can be shares, unit trusts, metals, properties, businesses and etc. But only invest to achieve  your goals which are long term, which maybe will take about 15 years or more, such as your kids education fund or your retirement funds. It is because something like the stock market can be volatile, in bad years the value can go down by 50% or more. You will need the time to wait for the market to bounce back. So if you are investing only to reach your short term goal (e.g. within 5 years), it is not advisable. It is possible of course, but it will not be easy.


Now that you know these 3 steps, can you do it? Most people that I know lacked in step 1 which is the base. You know from common sense that the base must be the strongest and biggest area, because that is what supporting the rest of the pyramid. I just do not understand why people keep making this mistake.

An ideal example should be like this. Mr A have a $50,000 worth of investment, $100,000 worth of savings and $300,000 insurance coverage.
If Mr A is to fall sick and the bill mounts to $100,000, the insurance is more than enough to cover that. So his investments and savings are untouched.

Not so ideal example is this. Mr B have a $50,000 worth of investment, $100,000 worth of savings and $20,000 insurance coverage.
If Mr B is to fall sick and the bill mounts to $100,000, the insurance is not enough to cover that. So he has to take $80,000 from his savings to pay the bill. He waste his savings because he do not have adequate insurance. Why do you want to do that? That is your hard earned savings. If you just plan properly in the first place, you don't need to waste your savings.

You choose, do you want to be Mr A or Mr B?

Cheers! Have a great day.