Many people's interest in money starts with investing. Then the market turns volatile or life stumbles once, and they discover the foundation was never solid. The financial pyramid is a picture that answers what should come first. Let's walk up it one level at a time.
What the financial pyramid is
It is a way of ordering financial matters from the base upward, on the same principle as building a house: the foundation has to be wide and strong before the upper floors go on. Rush to build the top while the base is still thin, and a single storm shakes the whole structure.
The base: security and risk protection
The base of the pyramid is whatever keeps life from going backwards: an emergency fund of roughly three to six months of expenses, and cover for the large risks — health insurance, and life insurance for anyone whose income others depend on. The reason these sit at the very bottom is that these risks can destroy every level above them in a single stroke.
The middle: saving for goals
Once the base is solid, save for goals with a defined timeline: a deposit on a home, a child's education, or the first portion of retirement money. The tools at this level emphasise certainty over high returns — deposits, bonds, or endowment and annuity policies, as suits the individual.
The upper level: investing for growth
This level is money working for long-term growth — mutual funds or shares — which comes with volatility you have to be able to tolerate. The key point is that money at this level should be money you are not in a hurry to use, because the levels below already cover emergencies. That is what saves you from having to sell at a loss when the market is not cooperating.
The apex: passing it on
At the top is planning the transfer of wealth — inheritance and the handling of assets — which becomes meaningful once every level below it is secure. If you are just starting out, there is no need to worry much about this level; simply know it is the destination.
Using the pyramid to check your own plan
Draw the pyramid and fill in what you already have at each level. Many people find they have the investment level but no health insurance, or several policies but no emergency fund. The picture itself will tell you which level your next sum of money belongs to. If you would like help going through the protection layer at the base, we are always happy to talk it through.