Can creating a financial pyramid help map your path to financial freedom?

At our last meeting with our financial planner, I learned about this idea of a financial pyramid.  Starting at the bottom, your financial life should consist of:

1. Emergency cash reserves of 3-6 months expenses.  This money should be in checking accounts, saving accounts, or money market accounts that you have easy access to when you need it.

2.  Longer term savings, safe investments, and 401k contributions.

3.  Insurance.  I learned that you should have enough life insurance to allow your family to operate as normally as possible for the next year or longer if something should happen to one of you.

Upper levels of the pyramid consist of stocks, mutual funds, real estate, and more riskier investments.  See the diagram below for the full description.

Financial Pyramid, adapted from MetLIfe, Inc.

You shouldn’t move up the pyramid until you have a solid base.  Carol, our financial planner, told us that our pyramid was upside down.  Every month we were putting money into a stock mutual fund when that money would be better served building an emergency fund.  She also told us to combine my rollover IRA and Roth IRA into one to avoid the fees that we’re paying on both of them.  I’ll have some tax liability, but it’s worth it considering how little is in each of them.

I’m a person that likes to have clear steps to follow so this idea of a financial pyramid is right up my alley.  We made the changes Carol recommended, and I’m more convinced than ever that financial freedom is in our future.

How would you rate the base of your pyramid?

How do you think this pyramid can help you reach your financial goals?