Financial Priority Pyramid

I always wondered why it was so hard for clients to decide what they wanted to do first. Decisions are never easy; buying a new car, getting their basement built or saving for retirement? So I had to come up with a simple Priority Pyramid for them.  Life was made easy with this approach for my clients and I both. The only question that they had to answer for me was: “where does this fit in your priority Pyramid?”

Here is what that Pyramid looked like:

We all look at life differently and have separate issues to deal with, however, our basic necessities, desires and dream at core remained the same.

Necessities

Defining necessities is easily said than done. We all can say Food, Clothing and Shelter are the 3 basic necessities we all have when it comes to survival. Closely observed, a house could be a rental basement to a luxury home situated down town. So when I look at a client’s budget for home I look at their current income, number of years they have been earning their current income and whether they have any inheritance. Food and clothing is also not easily decided upon. Some would love to dress in Hary Rosen suit and others buy their clothes from a local Mall during a bumper sale. With that said, financial planning has a simple rule of 40% TDSR which means you should be spending 40% or less on your basic necessities on a monthly basis. For this very reason, you have to qualify for a mortgage that is suitable for your income. Along with the necessities here I ensure that each family is protected against any mishap whether it is death, disability or a critical illness. For this step I recommend a 3-5% of their monthly income. Now we are sitting at 45% of our monthly net income.

Desires

Our goals, dream and wishes can also be a complex and confusing task to define. I have sat together with clients (husband and wife) that were happily defining their retirement goals only to find out how different they both see themselves as retired individuals.  

A young couple (Mr. & Mrs. Smith)* in their 40s decided that they would stay together only six months out of the year during their retirement. Mr. Smith would like to take time off with friends traveling the world and golfing while Mrs. Smith would run her charity organization helping kids around the world and travel to countries that are in need.  In any case, we had to settle for a nice retirement income for both that would last them at least their life expectancy and provide for their exotic initial years of retirement yet provide for those years that they may be forced to stay at one place with little or no mobility. Many times our mind is wondering not realizing that other forces beyond our control decide our journey of life. Yes I am speaking of health, disability and immobility due to unforeseen circumstances. Keeping these facts in mind is the only way to decide on a robust plan that is fool proof in good and bad both times. If you have not started putting away at least 15% of your income by age 40 for retirement, you are a bit behind in planning.  This could be including your employer provided pension or without depending on your goals and current circumstances. Many young clients have helped themselves by putting away 20% when they can afford it as they know they may take a break to pay a down payment or pay for kids education later.

Luxury

This is part of the financial pyramid that I enjoy the most talking about; rest is just life&work. Recently working with another couple from South-Asian background, I was surprized to hear that they are planning to spend 250K on their daughter’s wedding. Knowing the divorce rate in our country touching 51%, I would have said “No –Way” but this is what this family has been dreaming about for the past 15-20 years. It is not to help the kids with down payment or a car, it is to bring the whole family from different provinces and out of country together, showing them a good time and spending a fortune in less than 10 days is what this couple has been dreaming about. Not a problem, all I had to ask was “where does it fit in your Financial Priority Pyramid and are the first two steps fully covered?

No matter how you look at life, it should be fun and interesting. Never feel you are too late or too early, every thing happens at the right time. Always seek professional advice for a secured and safe financial plan or retirement plan. I know we are talking finance 101 here but I am hoping to attract youngsters and their interest in financial literacy while having some fun. For further clarity and questions, please email your questions directly to [email protected] or visit us at www.wefci.com.