David H. Kinder, RFC®, ChFC, CLU
Is Your Financial Planning Pyramid UPSIDE DOWN?
Updated: Jan 18
I have seen too many YouTube videos and articles from other "financial advisers" that seem to promote this financial planning pyramid. Here's their recommendations and why in a nutshell:
1. Have bank emergency savings Why? In the event of an emergency, you don't have to put any new debt on a credit card. How much? They typically recommend about 6 months for an emergency fund.
2. Term life insurance. Why? Just in case you pass away during your working years, the benefit can be paid out... but minimize your payments because we want you to pay off your debt (#3) and save in other investment accounts (#4-5).
3. Debt Elimination. Why is this after obtaining term life insurance? Because if you don't have insurance, your debt issues *may* be cleared up (or not), but your family will still be needing money. However, most people do cite credit card debt as being one of the largest hindrances to their long-term savings plans.
Forbes: New Report Shows Credit Card Debt is Hindering 401(k) Savings
4. 401(k) Maximization. Most advisers go straight to contributing to a 401(k) because you can "get the free money" in the company match. After all, it's "more money", right?
5. IRA or Roth IRA. This is when you've maximized your 401(k) plan and you can still contribute to these accounts - depending on your income and/or your spouse qualifies. 6. Permanent life insurance. This is often used by these advisers as another place for "tax advantaged" savings. So, what's the problem? The problem is... in the event of emergency or opportunity, you are LOCKED AWAY from your money! Paying off debt is a good thing, but it's not guaranteed that you can access it again. Funding a 401(k) plan is a good thing, but it's not guaranteed that you can access that money. You can either access it via loans or IRS-regulated hardship withdrawals.
Some might say, "That's the point - saving where you can't get at it so it'll be there when you can access it." In my opinion, if one is taught responsible financial, credit, and money management, it's far better to have capital when YOU want it, than when the IRS decides you can access it.
The Liquidity, Use, and Control Model
The Liquidity, Use, and Control model is all about structuring your finances so that it benefits YOU and you can access your money when you need it.
1. Bank Emergency Savings - Yes, bank savings is still #1.
2. Investment Grade Life Insurance - huh? This is a policy that is designed to build a great deal of cash values at competitive rates - as long as it is structured properly to do so. You can then borrow against the cash values for whatever purpose you want - creating a far more liquid place for savings than much of anything else!
3. Debt Elimination - as I said before, paying off a debt doesn't mean that you have access to that money again. Sometimes creditors will lower or eliminate credit card limits to limit their risk. Therefore, credit lines are not an appropriate place for liquid cash reserves to borrow against.
4. 401(k) - but only up to the match and if the match makes sense. We'll put some more thought into this. If you're getting a match of $ for $ up to 6%... that's a good match! If you're only getting $.10c on the dollar... that's an insult, not a match.
My Blog: Should You Maximize Your Employer's 401(k) Match? Let's do the math on that
5. IRA or Roth IRA for the same reasons as listed above.
6. Business or Other Financial Opportunities: Now, how many financial plans incorporate THAT concept? I've never seen one. Almost all financial plans from planners include these accounts that I've already listed.
Robert Kiyosaki says there are really only 3 kinds of financial plans:
Plan to be Safe & Secure
Plan to be Comfortable
Plan to be Rich
What most people don't necessarily know is that financial planners CANNOT make you rich! (Have you ever heard someone ever say, "My planner made me rich?" Me neither.) We can only make you more comfortable through growing your assets, managing tax liabilities, etc.
If you want to be RICH... a quality planner or consultant can help you to navigate estate planning and put the proper economic plans in place to help you protect your assets, pay estate taxes, and ensure that your business (or other assets) are passed on to whom you desire to have them.
With the proper financial planning pyramid with additional liquidity, use, and control of YOUR money, you can take advantage of opportunities as they present themselves! With the upside-down planning pyramid... you cannot. You're "locked away" from your money.
This video goes into some additional details: