“Those who fail to plan, plan to fail.”
There is a relationship between the level of risk and the potential return on an investment.
Although each investor’s portfolio varies, they all start with a plan. A financial plan is crucial to financial success. A solid foundation should be the start to reaching monetary goals.
Having a balanced portfolio of investments is important. A diversified portfolio does not come instantly or without planning. The financial planning pyramid is a widely accepted tool to help keep track of financial goals and accomplishments. It is simple to use and can be easily be adapted to your financial position.
5 Steps to the Financial Planning Pyramid
- Financial position and protection
- Saving and risk management
- Wealth accumulation
- Growth and diversification
Risk and Return
This pyramid demonstrates debt coverage, income replacement, investment products, and how they relate to risk and return. It shows the financial matters you should consider first like managing and reducing debt, creating an emergency fund, and having the proper insurances for unavoidable risks (death, sickness, injuries, etc.) As you move up the pyramid, income protection is typically replaced by wealth accumulation.
- The bottom of the pyramid tends to be the most liquid investment products that offer stability with lower return rates. A solid financial position and protection moves investors on to wealth accumulation.
- The middle of the pyramid is a combination of moderate risk and return. The ultimate goal is to maximize the return on your investments. Review your investments periodically with your financial advisor.
- The top of the pyramid tends to be non-liquid and speculative investments. Although the risks and potential for loss are increased, these investments have a greater possibility for high returns.
Plan Your Success
The financial planning pyramid is one way to determine where your money is now, and where it could take you in the future. Deciding goals is easy, however choosing the proper investment products is not. Consult with a financial advisor to ensure your investments are in line with your goals.