The financial planning pyramid – BW Businessworld

It is often said that financial planning is “easy but not easy”. In fact, the basic principles of financial planning are relatively simple – the ease of adhering to them is a different story! While rules of thumb and simplified frameworks for financial planning abound, the “pyramid approach” stands out as a clear winner.

What is the financial planning pyramid?

The pyramid is one approach to managing our personal finances. The basic rule of the pyramid is to start from the bottom and go up instead of trying to address all aspects at once. The four levels of the pyramid are (starting from the bottom): protection, saving, wealth accumulation and speculation.


“Protection” forms the basis of the financial planning pyramid and must therefore form the basis of any good financial plan. Put simply, coverage means “securing your base” by taking out adequate insurance to protect yourself against the risk of your financial loss or your health.

In addition, the protection also includes sufficient life insurance to reimburse your loved ones for the financial losses incurred as a result of the loss of your life. Finally, protection includes having a controlled amount of debt and constantly reducing (if not avoiding) expensive debts. For example, it is a pointless exercise to save money for your future goals and at the same time incur wasteful interest costs on your credit cards – you could just as easily use the savings amount to cancel your expensive loan first.


Once you’ve covered your basics, you can consider saving for your future goals. A well-crafted financial plan should be the cornerstone of your goal-oriented savings as it allows you to take a more holistic approach to your financial goals while keeping an eye on your cash flows, liabilities, and target priorities.

Start saving affordable, regularly, and in a disciplined manner to help you meet your important life goals, like buying a home, planning your child’s education, or planning your own comfortable retirement.

The volume of savings doesn’t have to be huge – the important thing is to start early so that your money has a chance to multiply and grow exponentially over time. For example, did you know that a monthly saving of Rs 10,600 for 25 years (Rs 32 lakh total) can grow to Rs 2 billion with a conservative annual return of 12 percent? In addition, the final savings amount will be reduced from Rs 2 billion to Rs 1 billion if this savings plan is postponed for 5 years! Ideally, your savings plan should also have automatic top-up mechanisms to ensure that your targeted investments grow in sync with your growing surplus.

Wealth accumulation

After putting your savings plans on autopilot, you should see unexpected gains (e.g. track record, mutual funds and bonds. Consider your unique profile and preferences before investing in wealth creation. Your investments must match the asset allocation that best suits your risk tolerance.

For example, if you’re a conservative investor, you should probably only invest 20 percent of your investments in stocks, 50 percent in debt and fixed income products, and the rest in real estate and / or gold. A more aggressive investor can have a very different asset allocation. Younger investors should ideally take a more aggressive stance towards their portfolios, even if their risk tolerance is low.


As the term suggests, speculation is basically no different from betting or gambling! An example of speculation would be trading stocks with the intent to sell them in a week or two, or speculative, leveraged trades in futures and options with a short-term horizon.

Speculation can lead to leaching losses or unexpected gains, but you don’t have to avoid it altogether – it’s the only really exciting aspect of financial planning, after all! However, it is wise to speculate last (after taking care of your protection needs, savings, and investments).

Another rule of thumb in speculation is to deal with money that you can afford to lose. That is, if the monetary value of these speculators unfortunately goes to zero, it will not cause you significant hardship or financial burden. The mistake most people make when speculating is firstly to speculate with all of their free surplus and secondly to speculate before attending to their primary financial planning needs first.

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