Smart Reasons to Save, Use and Invest Money

My Financial Pyramid

My Personal Financial Pyramid

Just for fun, I thought I’d create my interpretation of a hierarchical “Financial Pyramid” (modeled after Maslow’s Hierarchy of needs).

Financial Pyramid

 

Financial Pyramid Level Details (Top Down analysis):

Uber-RICH
Warren Buffet, Bill Gates, and similar people dwell here! I don’t know what it would be like to have a Net Worth greater than the GDP (Gross Domestic Product) of entire countries, but these people do…  This is (for the most part) a practically impossible level for the vast majority of us to obtain.

Wealthy
I would define this level in my financial pyramid model as those (in current 2010 dollars) having at least $20,000,000 million and above (if you live in a city like New York, perhaps $100,000,000 would be a better entry-level marker for you…).  Another hard level to conquer…  You would need the perfect combination to obtain and stay at this level (such as considerable luck, personal drive, income, investment mix would have to be perfect).

Rich
Depends where you live, but you would need at least enough money to travel overseas whenever you wanted (up to 4 time a year), without decreasing your net worth.  I would define this group as people having at least $5,000,000 in financial assets.  If you had the money invested in an investment that would yield 4%, that would provide you $200,000 in income per year…  The key idea here would be that the passive income (interest/dividends) generated off of your financial assets would earn you enough income to be above the top 2% of similarly worked for (earned) income by the non-rich.

Financial Independence
This is the break even point, this is where your investment and other passive income(s) earn you enough to cover your current life style expenses and inflation.  You’ll still want to contribute money to increasing your wealth though.  After all, recessions and inflation happens!!!

Upper Middle Class
Interesting level, many people can make it to this level by improving themselves and increasing the amount of money they have via investments, hard work, being frugal and continuous learning.  I personally don’t believe that getting a degree like an MBA is the magic ticket for inclusion in the Upper middle class (although it certainly can help!).  I think to be a part of this level, you’d have to either have a net worth of $1,000,000 or at least manage that much at a personal level.  Upper middle class is more than money though.  This is the level where IMHO, you should have developed some traditional sense of class, and people should ask you for your opinion on matters.  So respect or prestige (at least a little) comes into play.

Asset Accumulation
This is the strategic years, where you have already implemented or are following your plans developed in the lower level.  Time (hopefully) is your greatest ally.  Keep doing what you are doing and hopefully Lady Luck will also join your team and become an ally as well.

Action Plans for Wealth Development
At this stage, you have to think and really hustle to get ahead.  At this stage you have most of your core needs managed, and you are now trying to build your wealth for the future.  I almost called this the Battle Plans level, because you must develop strategies to conquer future expenses (kid’s college, kids cars, kids braces, retirement, car replacements, home repairs, increased life style, better vacation, etc).  At this level you must start the plans for these future financial concerns.  Even if they seem impossible to beat, at least start the process…  If you don’t, then the saying (by my #1 financial hero Benjamin Franklin)  “By failing to prepare, you are preparing to fail” will happen!!!  These are the hustle years, think and move quickly and wisely!!!

Money Control Basics
You have money to cover your shelter needs: Housing, real estate taxes, Utility costs and so forth…  This can be a monkey on your back that is slowing you down.  Personally, I started the Action Plans level above while still working on this level too.  By doing so, it took me a little bit over 10 years to conquer this level, but I think the way that I did it worked out well in my case.  Most people just make their mortgage payment as planned out by the banks, and that is fine.  The key is to have money (from some source) to cover this basic need.  Ideally, you want to have this paid off or have invested assets that can cover the mortgage payments in case you get laid off or something else happens…

Financial Survival Strategy
This is the most simple level, you need to have some way of getting food and clothes!  The preferred way is saving up your money so that if something horrible happens you can use that money to buy cheap foods and clothes for survival.  Of course, if you are really at this level you could get food stamps, or try growing your own food.  Having an Emergency Fund of some sort would go a long way to covering this level.  Perhaps $20,000?  I cheated this level, I had money but it was in investments.  This was risky, but I was young and the economy was strong…  If I were a college graduate today, I’d most likely consider a high yield saving account or government bonds for my emergency needs.

If you haven’t noticed in my previous posts, I like to measure things and create milestones and other markers to help me judge where I’m currently at on my financial goals.  Such tools help me define my financial progress and enables me see things that I might miss if I didn’t use them.  So that said (or written), I’m currently at the phase called “Action Plans for Wealth Development“.  I’ve been in it for a while and I expect to be in it for quite a while actually.

If you have other tools to help you in your progress, please share them too, such tools can really help others…

– Don

9 Responses to My Financial Pyramid

  1. I want to be at financial independence where investments and passive income can support my lifestyle! That way going to work is just because you enjoy the work that you are doing and not because you have to!

  2. I agree, in fact I just want to obtain the minimum level of financial succes before I start looking for a career that would make be more fulfilled.

    It’s all about drive, focus and worth ethic. (having a least an average amount of common sense/smarts helps too).

    • Thanks for the kinds words!

      Yeah, I’m at that phase too 🙁

      I wish I was higher, but at the same time it’s a pretty exciting phase 🙂

  3. The interesting thing here is that “Financial independence” really depends on where you are and what you’re looking for out of life. You could be financially independent without belonging to the upper middle class or even being near it, for instance, at least if you define classes in terms of consumption or net assets.

    • Yeah, don’t tell anyone, but financial independence (or the cross over point) is really a range. And the range can be actually quite broad depending on how much you wish to sacrifice in life experiences and opportunities.

      For me this model works well, it’s direct and simple. But this is just one tool that I use to envision the journey.