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Words of Wisdom

Words of Wisdom

The Financial Pyramid

Robert Brokamp, author of the "Motley Fool Rule Your Retirement" Newsletter, wrote a great article illustrating a Financial Pyramid as a guide to financial well-being.

Get Started: The Financial Pyramid

Most of us have seen the food pyramid. Created by the USDA in 1992 (though it seems like it’s been with us longer), the pyramid is intended to help Americans determine how to structure the components of a healthy diet. It has gone through several modifications (including revamp in 2010), its recommendations are often controversial, and its effectiveness at improving eating habits is questionable. But the fact that most American adults know about it proves that it has been at least a partially successful endeavor.

With that in mind, we present to you the Foolish Financial Pyramid, which we hope will be both memorable and vastly successful. We created it in collaboration with two Garret Planning Network advisors, both Certified Financial Planners: Abby Pons of Capella Financial in North Carolina and Maine, and Diane Blackwelder of Charleston Financial Advisors in South Carolina. In fact this pyramid was their idea, conjured up after listening to a speech Fool co-founder Tom Gardner gave at the annual Garrett Planning Network retreat. Tom talked about “nutritional nuggets” of financial advice, and within an hour Abby and Diane had a draft sketched out.  The Financial Pyramid illustrates several important concepts: 

  • A successful financial plan has a strong focus on defense and protection.

  • The items that make up the foundation should be your first priority. That doesn’t mean that higher-up items can’t be addressed before everything else is completed, but you should focus on the foundation until its contents are accomplished.

  • Devoting all your time to one or two aspects of your finances while neglecting others could leave your personal empire vulnerable to a collapse. Every area must be addressed and strengthened.

Financial and physical health have a lot in common. They both rely on smart consumption and good habits. It’s true that in the short term, good behavior may not be quite as much fun as sheer hedonism, but in the long term, it can pay off beyond your imagining — physically and financially.

As Abby explains, “Just as a good diet sets you up for good health, having your financial fundamentals right leads to long-term financial health. Without all the fundamental pieces of financial nutrition working together, you are at risk of getting really sick, and it may threaten life as you know it.” Unfortunately, the ill effects often happen after decades of neglect — and too late to make up for lost time.

Thus, the Financial Pyramid — like the USDA’s culinary version — emphasizes the fundamentals. It’s the monetary equivalent of Grandma’s exhortation to eat your vegetables: a solid prescription for long-term health and wealth. (And anyone who says veggies aren’t delicious is a small-f fool.)

Like all general financial guidelines, individual circumstances may warrant a re-ordering of priorities. For example, as you enter the stage of financial independence, managing your investments becomes more important. When you have $25,000, a 10% swing in the markets is a change of just $2,500. However, if you have $500,000, a 10% movement sees your net worth increase or decrease by $50,000. Those with extensive portfolios will need to spend more time on the top of the pyramid than those who are just starting out.  But regardless of the size of your portfolio, you still have to maintain that foundation of financial fundamentals.

As you go through this issue — and the 2011 checklist insert — and contemplate which tasks you should tackle first, let the Financial Pyramid be your guide. It’s a surefire blueprint for being healthy, wealthy, and wise.

©2011 The Motley Fool,