How to Manage Your Budget Using the Financial Planning Pyramid
Financial planning isn’t just for the wealthy—it’s for everyone! Having a solid plan helps you reach your money goals, whether it’s buying a home, saving for your child’s education, enjoying a stress-free retirement, or finally taking that dream vacation.
But it’s not just about big goals. A good financial plan also prepares you for life’s surprises, like medical emergencies, job loss, or unexpected home repairs. When you plan ahead, you’ll have peace of mind knowing you’re ready for whatever comes your way.
Understanding the Financial Planning Pyramid
The financial planning pyramid illustrates how individuals can allocate their funds across different investment levels. The wider a section of the pyramid, the larger the portion of funds that may be committed to those types of investments. However, financial situations vary, influencing how the pyramid is structured for each investor.
For example, an SME owner seeking business growth may allocate more loan to peer-to-peer (P2P) financing to pursue higher returns. In contrast, a retiree may prioritise safer investments, such as low-risk P2P notes, to protect their capital while still generating steady returns.
There isn’t just one way to build a financial planning pyramid. Some versions have only a few levels, while others break things down into many details. But no matter the version, one key idea stays the same—the safest financial choices are always at the bottom, while the riskier ones are placed at the top. This structure helps people balance their investments based on their financial goals and risk tolerance.
Levels of Financial Planning Pyramid
The financial planning pyramid is inspired by Maslow’s Hierarchy of Needs, a psychological theory that explains human motivation.
Figure : Pyramid of Priorities
Examining each step in greater detail.
Level 1: Covering Your Essential Needs
At the base of the financial planning pyramid are the fundamental necessities everyone must prioritise. For most individuals, these essentials include:
Food: In Malaysia, a typical grocery bill for a single person might range from RM400 to RM600 per month.
Shelter: Monthly rent for a 45 m² furnished studio in a normal area averages around RM1,441.
Utilities: Basic utilities, such as electricity, heating, cooling, water, and garbage, for an 85 m² apartment average approximately RM348 per month.
Transportation: Depending on usage and location, monthly transportation costs can vary, with some estimates around RM150.
Health Insurance:As of 2024, about 42% of Malaysians do not have either personal or company-issued medical insurance.
Given the rising medical costs, which have been increasing at an average of 8% to 9% annually, securing health insurance is crucial to protect against unexpected medical expenses.
Level 2: Building Financial Security
Given the rising medical costs, which have been increasing at an average of 8% to 9% annually, securing health insurance is crucial to protect against unexpected medical expenses.
After addressing basic necessities, the next step in the financial planning pyramid involves enhancing financial security.
Term Life Insurance: A term life policy is a cost-effective way to protect loved ones. A 30-year-old male non-smoker can get RM500,000 coverage for as low as RM2.64/day (~RM964/year)
Disability Income Insurance: This insurance provides monthly income if illness or injury prevents work, protecting financial goals like retirement. SOCSO offers some coverage, but private policies vary by age, occupation, and coverage amount.
Repaying High-Interest Debt: Clearing high-interest debt is key to financial stability. In Malaysia, credit card interest rates range from 15% to 18% per annum.
Level 3: Advancing Your Financial Goals
After securing basic insurance, eliminating high-interest debt, and initiating retirement savings, it’s time to focus on significant financial milestones, such as purchasing a home and planning for a family.
Saving for a Home Down Payment
In Malaysia, the typical down payment for first-time homebuyers ranges from 10% to 20% of the property’s price. For example, on a RM500,000 property, a 10% down payment amounts to RM50,000.
Planning for Family and Children’s Future
If starting a family is part of your plan, it’s essential to prepare for the associated financial responsibilities. The cost of raising a child in Malaysia, from pregnancy through university education, is estimated to range between RM400,000 and RM1.1 million.
Level 4: Enhancing Financial Stability and Preparing for Retirement
At this stage, individuals often find themselves well-established in their careers and family life.
Prioritising Children’s Education
Investing in your children’s education is a significant consideration. In Malaysia, tuition fees at public universities range from RM7,500 to RM15,000 for the entire program.
Maximising Retirement Contributions
With retirement approaching, it’s crucial to enhance your savings. In Malaysia, the Employees Provident Fund (EPF) serves as a mandatory retirement savings scheme. Additionally, the i-Saraan program allows voluntary contributions with a government incentive of 20% per year (up to a maximum of RM500)
Level 5: Enjoying Financial Freedom and Legacy Planning
At the pinnacle of the financial planning pyramid, individuals can reap the benefits of their diligent financial preparations.
Transitioning into Retirement
In Malaysia, retirees can live comfortably on approximately $2,500 (around RM10,500) per month, which includes renting a three-bedroom condo with an ocean view.
Fulfilling Aspirations
With children grown and mortgages paid off, retirees often have the financial flexibility to pursue deferred dreams
The Bottom Line
In conclusion, looking at each step in more detail helps us understand the process better. It shows us why each action is important and how it helps to achieve the final goal. By breaking things down, we can make smarter decisions, improve the way we do things, and create a stronger strategy. This approach also helps us avoid mistakes and find better ways to succeed.
Interested to learn more about our SME Financing Options?
*This article is not meant to recommend CapBay products or be used as a tool to make any investment or financial decisions. Product recommendations must be independently evaluated before you invest. Any product recommendation by CapBay must not be regarded as financial planning or financial advice.
