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Banking 101: Use the Financial Pyramid to Guide Your Planning


Written by David Rodeck | Published on 5/24/2019

Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.

Financial planning involves so much information across so many different topics that it can feel overwhelming. Where do you even get started? Two academics dreamed up a simple graphical chart to help clarify financial planning goals, and the financial pyramid was born.

In a 2011 research paper, economic experts William Gale and Benjamin Harris proposed the financial pyramid simplifies how people thought about financial planning. Harris and Gale took the United States Department of Agriculture (USDA)’s well-known food pyramid as their model to help Americans figure out what matters most for financial planning.

We spoke with Harris, visiting associate professor at Northwestern and former chief economist and economic adviser to the former vice president, to see what this approach would look like and how it can help you manage your finances.

In this article we will cover:

What is the financial pyramid?

In 1992, the USDA created the food pyramid graphic as a basic aid to help Americans plan their diet. The wide base of the pyramid showed foods people should consume more of, like fruits, vegetables and grains. The narrow top part showed foods that should be a smaller part of a healthy diet, like fats and sugar.

With a quick glance, people would get a reminder about how much of each food type they should be eating. Gale and Harris thought that this graphic model would work well to remind people which sorts of products they should include in their financial plans.

“Just like the USDA puts out graphics to help Americans make sound diet choices, this graphic could help people make better financial decisions through helpful rules of thumb and resources to improve financial literacy,” said Harris.

They thought that a government agency — the year they published their paper, 2011, was the same year the Consumer Financial Protection Bureau (CFPB) was being established — could produce and release a financial pyramid to better present their recommendations.

“The goal of the financial pyramid is to help people make better choices around areas such as asset management, debt avoidance, lower management fees and tax considerations.”

How can I use the financial pyramid for financial planning?

In their research paper, Gale and Harris pointed out that the U.S. Treasury promoted a list of Financial Education Core Competencies. The list includes tips for financial planning like tracking spending habits to develop a spending plan, saving for an emergency fund and balancing risk with return when investing.

Harris believes that while this advice is helpful, a graphic would make it easier for people to remember the tips. No agency of the federal government has adopted Harris and Gale’s financial pyramid concept, however other organizations have stepped in and published their own versions.

The Financial Counseling Network created a financial pyramid ranking investment choices. At the bottom, they put safer, low-risk investments that are less likely to lose money like CDs, bonds and fixed-rate IRAs. As you go up the pyramid, you move into investments with more risk but also with higher potential returns. Through a quick glance, you can see whether a new investment fits your goals based on the pyramid.

The financial blog Financial Highway created another version that ranks in which order you should prioritize different goals. At the base, you first focus on protecting your family and putting yourself in a safer financial position by buying insurance, paying debt and building your emergency fund. Once you’ve taken care of the goals in step 1, you can move up the pyramid to other financial priorities, including building your savings, investing for retirement and making more speculative investments like real estate or collectibles.

These are just a couple examples of the financial pyramid and there are other versions out there. If you find one that’s helpful, you could put a copy on your fridge or somewhere else you see often. That way, you get a daily reminder about what to focus on for your financial plan.

Can I create a personalized financial pyramid?

We asked Harris about whether you could customize a financial pyramid for yourself. He was hesitant.

“A financial pyramid is designed to provide guidance, and I’m not sure there is an opportunity for people to personalize one,” he said. “The idea is that people can take general advice, learn more about particular issues and decide what is the right path is for them. “

He recognized though that with financial planning, it’s personal so there are few one-size-fits-all approaches that make sense. That’s why he believes for a financial pyramid to be successful, it must provide advice that is sound for most people, like paying off high-interest debt first or taking advantage of the employer match on a workplace retirement plan.

To find a pyramid that works for you, check out a few versions and see which one seems like the closest match to your goals. If you meet with a financial advisor, you could also discuss the concept with them and see whether they could help you create one based on the recommendations in your plan.

Just keep in mind that the pyramid is only a visual reminder of general guidelines. It doesn’t offer enough information to replace a complete financial plan.

Retirement saving tips for the financial pyramid

Financial Planning, a magazine and website for financial advisors, created another pyramid focused on retirement planning. For the most important step at the base, they recommend investing in yourself. Not only should you eat well and exercise, you should also build skills to increase your income and study the rules for retirement planning, like the difference between a Roth and Traditional IRA.

From there, the next priority on their pyramid is saving. Recommendations in this step include working to increase your savings rate, diversifying your portfolio across different assets and avoiding unnecessary investment costs when possible, like taxes and fees.

At the top, they remind readers about activities you should minimize or avoid altogether: Trying to time the market, dealing with pushy financial salespeople and making investment decisions based on your politics are all moves that could get in the way of your retirement plan.

These retirement savings tips are all straightforward, but also easy to forget as you deal with everything else in life. Having them all listed out in a simple graphic can help you stay on track.

Conclusion

Given how complicated financial planning can get, it’s refreshing to have a nontechnical reminder about what to focus on each day. Hopefully, the government takes Harris’ advice and creates an official version of the financial pyramid soon. Until then, you can work off the examples listed in this article.

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