Blueprint for the Financial Planning Tower

The idea for the tower came as I started my financial planning firm. I began sharing with my friends my newfound career shift from stay-at-home-mom. I would say “I’m a financial planner” and they would respond, “Oh, so you sell insurance.”

No, no, no. That wasn’t right at all. I had to find a way to explain what financial planning was. So I began reading, researching and drawing.

Armed with background information from the likes of the Bible, the Certified Financial PlannerTM board, and lots of books and online searches, this idea came to me. Every financial group seemed to have a pyramid type shape, which seemed  to be a good place to start. The images I found were very focused on investing, which is only a piece of the puzzle, and I wanted to cover all aspects of financial planning. 

Two other pyramid shaped concepts came to mind. First, Abraham Maslow’s hierarchy of needs which explains how humans are motivated. Second was the Food Pyramid. I know that is now passé, but it still seemed an appropriate metaphor.

Should I call it a pyramid? Nope – sounds too much like Bernie Madoff and a pyramid scheme where people lose money. A tower sounds better. Towers are strong and sturdy and something to be proud of when complete. After much introspection (because that’s what introverts do) I developed the concept of a Financial Tower.

Level 1 – Financial Planning Tower Basics

Maslow’s hierarchy of needs begins with Physiological needs. Humans cannot really grow beyond this level until these needs are met. For example, if you are hungry, it’s difficult to focus on taking care of your children. You have to meet this basic need first.

Similarly, grains at the base of the Food Pyramid were thought to be the foundation for a solid diet.

Your budget is the foundation for all of your financial planning and makes up Level 1 of Your Financial Planning Tower.

Income

The base level of the tower begins with your Income. Remember when you were a kid and your mom gave you an allowance? Or maybe your grandmother gave you some money for your birthday. Maybe you earned money for babysitting or lawn work. Regardless of where it comes from, income is where everyone’s budget begins.

Expenses

Next comes your Expenses. Once you have some income, you’ll want to spend it. Notice that your expenses block is smaller than your income block. When your expenses are less than your income, you’ll have money to set aside in savings for an Emergency Fund. 

Emergency Fund

Your Emergency Fund is a critical corner of support for your Financial Planning Tower. Not only does this savings allow you to have money for unexpected events, it builds the habit of setting aside money. It trains you to save for a rainy day. Conventional wisdom says to have between 3 to 6 months worth of expenses in savings, but that number may be more or less, depending on other factors. Your job security, amount of debt, income, and other investment resources also factor into the right amount.

Notice that if you don’t have this block of your tower complete, the pieces above it are likely to fall.

Level 1 is the place where everyone starts budgeting. Just like Maslow’s concept of your Physiological needs, you have to have a budget first. If you have never created a budget, you still have one, it’s just dysfunctional. 

Just like the complex carbohydrates this level represents, your budget provides lots of energy, but little nutrition. It’s essential to your needs and always in motion, but doesn’t really grow your overall wealth unless you use it wisely.

As a planner, I want to be sure your budget works.

Level 2 – Financial Planning Tower Safety Needs

Maslow’s second level is Safety. Until this need is satisfied, more or less, we can move to the next level. In  financial planning terms, this level of Your Financial Planning Tower is critical. Your safety needs protect the things you have and people you love, providing a strong second level for your tower. Financial planning around risk solves everyday problems.

Fruits and Vegetables

Families need more savings for specific spending items. You know when you need new tires on the car? You may not want to purchase them, but it certainly feels better to use money that you have instead of putting them on the credit card to pay another day. That’s why these extra savings categories are fruits. Everyone loves fruit.

We also need insurance and estate planning. These are your vegetables because nobody likes them, but you have to have them because they are good for you. 

Operations and Maintenance Funds

The first block is your Operations and Maintenance Funds. (By the way – if anyone comes up with a better name, please let me know!)

Anytime you own something that’s very large, you will have to take care of it. And that costs money. The three main things you need to maintain are:

• Home
• Cars / Vehicles
• Health

There will be times in life when you will need money to pay large expenses. For example, you may need a new roof for your home. Or you may need tires for your car. Maybe you need to meet a large medical deductible. These expenses are not in your normal budget. You should set aside money so that when they happen, you’ll be able to pay for them without having to dip into credit. 

Long Term Goals

Often we have specific goals we want to fund. For example, maybe you are saving for a trip to Europe, a wedding, or you are looking to buy a new car within the next few years. These are goals that you can budget and save for on a regular monthly basis.

That trip to Europe for the family may cost $10K. So, if you save a regular amount each month, plus any bonuses you may receive, you may decide that you can take that trip in about two years. That’s a powerful goal that the whole family can get behind!

Insurance

Managing risk helps protect from catastrophic hazards that could bankrupt your financial plan. Insurance provides a means to protect your family if you pass away. And it replaces your income incase you cannot work.

When planning, you will want to look at your health and property needs to protect your larger assets.

Reviewing your life insurance and disability insurance are a means of protecting your income. I’ve seen lots of plans with too little in disability and too much in life insurance. 

Long-term care is a category unto itself. You may or may not need this type of insurance, but it may be difficult to make this decision without some additional expertise.

A proper needs analysis will help you decide the right amount of insurance as well as the right type of policy to purchase.

Estate Planning

Estate planning is not just a concept for rich people. It’s the surest way to protect your family if you aren’t there.

Estate planning is the only place that you can designate someone to be the guardian of your children or manage funds if you’re incapacitated. You do not want to leave these decisions to the laws of  your state.

This is not just a need for when you die – it’s also for while you are alive. If you are incapacitated, you want to be sure you have the right people making your health and financial decisions.

As our dependence on technology grows, your digital accounts need attention. Uncle Ben may be a great executor when dealing with accounting paperwork, but Cousin Zach might be the best choice to manage your Facebook and Twitter accounts when you are not here.

Having instructions like these gives you the peace of mind you need to move to the next level.

Level 3 – Financial Planning Tower and Investing

Now that your first two levels are set, we move up to the fun stuff that everyone wants to talk about – retirement and investments. This is the traditional venue for financial planning.

Level 3 of the Financial Planning Tower is equivalent to Maslow’s Love and Belonging level. This is where we develop our sense of belonging and really begin to feel good about ourselves and others. The Food Pyramid expresses this level as Dairy and Meats. It’s much richer up here!

Retirement Funding

Everyone loves to talk about how well their 401(k) is doing when the market is up, and how terrible things are when markets are down. The top questions that I get revolve around when, where and how much is needed to retire.

Personally, I believe the government has made it extremely difficult for working families to save for retirement. It’s too complex! People have gazillions of questions about IRAs, Roth IRAs, 401(k)s and other retirement plans. Pension plans also get their fair share of concern. These plans are more common than you may think. In addition to teachers, police, firefighters and other state employees, many companies still offer pensions to employees.

And don’t get me started on Social Security, except to say that yes, I believe it will be there when you retire. 

Education Funding

Families look out for their children, so college saving runs a close second to retirement in terms of major goals. Unfortunately, we often wait too long to begin addressing this item, so parents seem panicked when they realize they only have two years to save.

When considering college, parents have many questions including:

• what is the viability of the student loan system?
• how do we effectively save?
• what is a 529 Plan and how does it work?
• can we afford the rising rate of education?

The rules around college often change with a new Presidential administration. We also need to consider if our children are ready for a four-years program. They may be better suited for two-year college, an apprenticeship or waiting and attending later. There are so many variables to address it can be overwhelming without some help.

Level 4 – Financial Planning Tower and Your Passion

Now that these three levels are covered, we move into what Maslow would call Esteem. Just like our body fat, our Esteem keeps us warm and happy. Level 4 of Your Financial Tower is your passion. While it is not directly related to money, this level is an emotional driver for all our goals.

We need to feel good about what we are doing in our life. We can be happy being an engineer, housewife, accountant, food server, or any number of careers, but often we are not. That may be because we haven’t done a good job building our tower. When we have not met our “deficiency needs”, as Maslow says, we have a difficult time being motivated.

When we are misspending and not saving, we always feel like we are behind the 8-ball. We feel like we can’t leave a job where we are unhappy because we have bills to pay and mouths to feed. We may feel trapped in a role that isn’t fulfilling because it doesn’t use our God given talents.

This is a time to rethink our purpose, maybe change old habits, and set new financial goals so we can shift from a job as an accountant to a passion of horse training. Or a food server to a bakery owner. Or a housewife to a financial planner.

Level 5 – Financial Planning Tower and Your Legacy

Level 5 of Your Financial Planning Tower is your Legacy. For us, that means our legacy – like Maslow’s self-actualization or the sugar on top. These are the things we leave behind.

This doesn’t necessarily mean the money we leave, although that is part of it. We’ve all heard the horror stories of debt-ridden people with nothing left for the kids. Families are then left to fight over the teapot.

Our legacy is truly how we are remembered when we are gone. Do you want to be remembered as someone who didn’t have much money, but was a great photographer who shared his work with everyone? Or would you rather be remembered as an overworked executive who didn’t have time for the kids?

Our legacy often has very little to do with our money.

In the Basement of the Financial Planning Tower

Now, if you look at Maslow’s tower, or the food pyramid, you’ll notice that that’s all there is. A few levels that build a triangle shape. However, in finance, we still have to deal with our debt.

I really had to think about this one, since there was no other comparable concept within the models I had. So I looked at my tower and decided that debt is just spending more money than we have, so it had to be an expense. But it couldn’t go up, so it had to go underneath our expenses. And down, and down.

Then, I thought what would it be like if we didn’t get the emotional support we need? And what if we didn’t get the food we need to survive? Well, that would be starvation, and that’s exactly what debt is.

When you continue to borrow money, your income goes to pay for expenses you couldn’t afford in the first place. You can never build your tower up because you are always busy filling in that hole. Debt robs us of the funds we need to build our tower, so we have to use it prudently and keep it under control. 

Construct Your Financial Planning Tower

After years of planning and telling the story of your Financial Planning Tower, I have seen it positively impact others. People often tell me that they never thought of planning that way, or that the image made so much sense to them.

Pathfinder Planning uses the Financial Planning Tower to help working families find gaps in their finances, fill them in, and continue building. Here are some examples of the successes our clients have had:

• Paid off $100K in debt
• Had disability insurance in place before a skiing accident
• Completed estate planning to accommodate an adult special needs child
• Rebalanced retirement accounts resulting in reduced investment fees and increased return projections
• Savings to support their family when the breadwinner lost their job during COVID
• Bought a second home
• Changed from a job to a dream before age 50

We understand how difficult it can be to address all your competing needs at once. The Financial Planning Tower gives you the structure you need to prioritize and achieve your goals. These concepts can and do work for our clients! They can work for you as well.

Pathfinder Planning LLC is a registered investment advisor in North and South Carolina. We serve young adults and working families by providing personal financial planning and asset management for a simple fee. www.pathfinderplanningllc.com

The post Build Your Financial Planning Tower appeared first on Pathfinder Planning.