Building a Personal Financial Pyramid: An “All In One” Plan

Americans generally do a good job addressing their household financial needs, especially with the three primary household finance tentpoles – investing, personal finance/budgeting, and debt reduction.

The problem is that, too often, financial consumers tackle these money management issues one at a time, when it’s actually better to create a holistic approach to household finances that ties the three tenets together in one easy-to-use package.

For confirmation, check out Schwab’s recent Modern Wealth Index, which states that a comprehensive, written household financial plan “can lead to better daily money behaviors.”

“When we look at the top 10 percentile of overall performers in our Modern Wealth Index, there’s a consistent theme that they’re diligent planners—three in four say they have a written financial plan,”  says Terri Kallsen, executive vice president and head of Schwab Investor Services. “Planning is critical to achieving any goal. It’s like establishing an exercise regimen to get in shape—we need to take the same approach to keep our finances in good health and on track.”

How to Build a Financial Pyramid

Now that it’s clear that a comprehensive household financial plan that encompasses investing, budgeting, and debt management, what’s the best way to create and sustain such a plan? Money management have some opinions and tips on how to get the job done.

Michael Lewis, a certified financial advisor with Tutor Financial Advisors in Cary, N.C. offers a three step-strategy.

“It all begins with a plan,” he says. “When I work with clients, the first step is to dream in great detail. Most families have never stopped to think about what they are trying to accomplish in life and big issues like retirement are a foreign concept.”

Lewis says families – especially young families – usually don’t know what questions to ask, let alone know the answers. That’s why he guides them through a comprehensive household financial planning process where both parties start by defining their needs at critical junctures.

“First, we look at long-term financial issues, like retirement goals. Then we identify immediate goals, on a scale of zero-to-five years,” he says. “Once we paint the picture, we begin to look at the household as a business. We build their household balance sheet, income statement and cash flow analysis. We review their budget in great detail. Even with mature households, you’d be surprised how little they know about
their spending habits.”

Then, after identifying major financial and lifestyle risks, like outliving one’s money and a major disruption of income (like a layoff or health issue), Lewis is in a good position to outline a financial plan.

That plan not only covers the three major personal financial tenets covered above, it also needs to be checked regularly, just like going to the doctor for a checkup or taking the family SUV in for maintenance.

“It’s important to remember that a plan is a fluid document that must be reviewed periodically,” Lewis says. “Life is constantly changing and the plan must be evaluated for its effectiveness in the face of uncertainty.”

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Which Financial Category Should Be Prioritized?

Ask a financial planner which household personal financial category should be prioritized, and you’ll likely get a different answer.

Mostly, however, a well-crafted plan will free money up to more or less equally address budgeting, debt, and investing.

“The best steps to bring all these plans together is to figure out what your priorities are first – that will help you to organize your cash flow, savings, and any next financial steps,” says Jim Marrocco, a financial planner and founder of Thinking Big Financial, in New York, N.Y.

That makes it easier to deal with of one’s household financial priorities at the same time. “Basically, building awareness of your monthly cash flow, total spending, and the leftover amounts should be the priority,” Marrocco says. “Then, focus on the money that’s left over each month.”

That’s where money is freed up to invest and build a solid financial future. “Once you have a good grip on cash flow, automate any money left over into a savings account, an investment account, or some other investment that aligns with your financial goals,” he says.

That usually means stocks, bonds and funds. Additionally, alternative investments like bitcoin, gold, real estate, or even launching a business can be part of a long-term investment plan – as long as any investment meets one’s financial goals.

“These types of investments should be incorporated once you have a long-term financial plan established,” Marrocco adds. “If saving for a kid’s college education is a priority, then finding the right investment vehicle to do that should follow suit. Only stick to what you know — and if you realize you don’t know something or it seems too good to be true – find an investment professional that can help you see the big picture.”

Bringing It All Together

Overall, a good financial plan has an investment component that synchs seamlessly with a household’s budget and debt management plan.

Yet all things being equal, nothing can really happen on the investment front until some foundational pre-planning issues are addressed. Of those, debt is the biggest issue.

“The number one most important personal financial tenet is without a doubt debt management,” says Elliot Cha, partner and financial specialist Pair Shaped Official, a digital finance and lifestyle platform. “Often, debt erodes any chance for savings and budgeting and investing because of mismanaged debt.”

Cha says that interest and penalties accrued on mismanaged household debt will punitively penalize the account holder if payments are late or not made at all, not to mention ruin his or her credit ratings. “That, in turn, leads to decreased financial opportunities (like buying a home or getting a credit card) and more expensive debt and higher interest rates,” he says.

Paying off debt with useful financial tools like mobile phone savings apps and personal loans can help control household spending on a monthly basis. “Only after debt is managed properly can a household claw its way out to financial freedom and start deploying the other strategies like investing,” Cha says.

Once debt is properly handled, Cha advises taking the following “step-ladder” approach with other household financial priorities:

Address budgeting. If the household is generating enough income and their budget plan is working so there’s a surplus every month, then the household decision-makers can start to think about savings.

Address savings. Individuals, in consultation with financial professionals, should determine how much money should put in a savings account for a rainy day.

“Determining factors here could include how much should we put away in case of job or how much emergency money should be saved in case there’s water damage, or the boiler breaks,” Cha says. “The idea is to build a safety net for all of life’s unplannable curveballs. Once there is enough in savings that the household can weather out an unforeseen event, the household can start to think about investments.”

Address investments. The notion of investing in today’s world is not the same as it was even 20 or 30 years ago, Cha says.

“Supposedly safe ‘risk-free’ investments like savings accounts or government bonds are no longer generating decent returns,” he says. “Remember, any investment requires a degree of risk, so it’s great to have put away money into savings and balance that with higher reward, but hire risk investments like stocks, bonds, real estate, and commodities.”

The Takeaway on Building a Comprehensive Household Financial Plan

What’s the best piece of advice for creating, implementing and managing a holistic household money management plan – one that that incorporates investing, savings and budgeting and loans and debt management?

“My best advice is to automate,” says Melissa Brock, money editor at Benzinga, a popular online personal finance platform.

Brock advises financial consumers to leverage a robotics-type app or strategy that enables you to automatically take care of savings, debt and investing all in one place. That type of financial tool should be able to accommodate the following important household financial tasks.

Handle investing: All you need to do is figure out how much you want to invest, link your accounts, determine your risk tolerance and timeline. Robin Hood is a good app for those purposes.

Take care of savings: Whisk the appropriate amount into your bank account for your emergency fund. Handle budgeting: Use a budget app like Mint or Personal Capital to monitor everything and keep you apprised on progress.

Quickening the pace of loans and credit payments. Have your lender take out the same amount on a schedule. Better yet, include more money to that amount every month so your loan gets paid off faster, thus reducing debt faster.

“Every penny should be allocated so you know where it’s going ahead of time – especially when it comes to investing and saving for your future,” Brock says.