The Financial Planning Process: A Step-by-Step Guide
The Financial Planning Process: A Step-by-Step Guide
Financial planning is essential for parents, businesses, and individuals.
Do you want to be able to afford what you want, when, and how you want? Do you want to achieve your long-term goals, such as saving for education and planning for retirement?
Alan Lakein said, “Planning is bringing the future into the present so that you can do something about it now.”
Because we all want to achieve financial freedom and build long-term wealth, having a financial plan and being disciplined will allow you to crush your financial goals.
So, in this article, we will discuss the financial planning steps to inform you about the financial planning process and procedures so that you can channel your finances in the right direction. Before we dive in, let’s look at what financial planning is.
What is Financial Planning?
Financial planning is setting specific goals for your money and determining how to channel your funds into many plans ranging from savings and investing, spending projects, emergencies, and anything related to your finances.
What are the roles of a financial planner?
Financial planners deploy their knowledge and expertise to facilitate financial planning by determining a person’s or business’s life plan.
The primary goal of a financial planner is to help clients recognize their financial planning needs, current plans, and investment programs that will help them meet their financial needs. As a result, a financial planner has an in-depth understanding of a wide range of tools and products needed for financial planning. Their primary role is to help customers choose the best product for their specific needs.
What is the purpose of financial planning?
Some of the objectives of establishing a financial strategy are:
To ensure the availability of funds when neededThe whole notion behind financial planning is to create funds and make them available to the investor when needed. Therefore, financial planning aims to ensure that finances are accessible to meet various needs, and a solid financial plan ensures these goals are met.
- To create the capital structure
The capital structure mainly comprises business capital, the amount and type of money required in each business. This structure includes long-term and short-term debt ratio planning.
- Avoid shortage of funds.
Another crucial goal for every business is to avoid raising excessive funds. Companies will always need help paying their staff when money is tight.
On the other hand, with additional finance, the business can produce returns, pay its employees, and run the business properly.
- Indicate the time and source of the funds estimate:
Time is of great importance to any business. It is, therefore, crucial for every business to provide the right fund in the right place at the right time. It is as essential as the generated amount itself. However, when time is a crucial factor, the source of these funds must also be considered.
Factors to Consider Before Writing a Financial Plan
Before creating a financial plan, there are a few things to consider. It should also be noted that there is no set format for financial goals.
A Certified Financial Planner can guide you through the financial planning process to ensure you build a plan that meets your needs and goals. When completed, it can inspire you to make short-term improvements to facilitate a smooth transition through life’s financial stages.
The items listed below should be reviewed and addressed as needed:
Risk Management Plan: This covers a review of life and disability insurance, liability insurance, property and casualty insurance, and catastrophic cover.
Approach to retirement: Whatever your priorities, your plan should contain a strategy for accumulating the necessary retirement income.
Estate planning involves making arrangements for the benefit and protection of your beneficiaries.
Tax Reduction Strategy: A strategy to reduce personal income tax to the extent the tax code permits.
Long-term investment strategy: A tailored strategy based on specific investment objectives and risk tolerance profile.
Importance of financial planning
All the different stages of financial planning aim to establish a company’s long-term financial objectives and its strategy, budget plans, policies, and projects. As a result, the company ensures agreeable and realistic financial investment policies.
Here are some of the reasons why financial planning is essential:
- Financial planning helps ensure harmony between incoming and outgoing assets to maintain stability.
- It ensures sufficient funding.
- This planning also assists in expanding and developing programs that sustain the organization’s substance over the long term.
- Financial planning also helps to reduce vulnerabilities that can serve as support for the development of the organization. This helps in ensuring the benefits and security of the business.
- Moreover, with sufficient funding, the organization will be better positioned to deal with this scenario.
- Financial planning helps maintain a healthy balance between expenses and income.
- The strategy helps in managing cash flow and hence avoids unnecessary spending.
- Contributes to building a corpus and improving savings.
- It maximizes returns on investment.
- It reduces his liability to tax.
- Financial planning helps generate wealth and ensures superior wealth management to achieve life goals.
- Finally, financial planning ensures financial security after retirement.Â
Now that you know what financial planning is and the importance of financial planning, let’s take a look at the steps of financial planning.
What are the steps involved in financial planning?
Since financial planning is a crucial part of helping businesses grow and helping individuals achieve their financial goals, here are the financial planning steps:
Step 1: Define and decide on your financial goals and ambitions.
The goals and objectives in the financial plan will serve as a guide and should serve as a roadmap for your financial future. Here is an overview of the things you need to consider:
- They must be measurable, attainable, and easy to understand.
- Distinguish between your needs and your wants.
- To help you track your progress, it should be agreed upon and documented with your financial adviser.
Financial planning professionals begin the process by asking their clients questions to understand better who they are and what they want.
Some qualitative questions help the client better understand their health, family relationships, values, earning potential, risk tolerance, goals, demands, priorities, and current financial situation.
If a business, queries should focus on income, expenses, cash flow, savings, assets, liabilities, liquidity, taxes, employee and government benefits, coverage insurance, and estate plans.
The advisor can use open surveys to get the information needed to start the strategy. This information can range from financial goals to thoughts on market risk to fantasies of retiring to the Caribbean.
Step 2: Identify and select objectives
This is one of the essential steps in financial planning because your financial goals will determine your financial success. Here, professionals will deploy their financial expertise to help clients choose and set goals. They will ask clarifying questions to help identify these goals.
For example, what is the timeframe to achieve these goals? What is your risk tolerance? Are you willing to take the high relative market risk to achieve your financial goals, or would a conservative portfolio be a better alternative?
The financial advisor and the client will decide which goals are most important based on the quality and clarity of your information. Your consultant will conduct a thorough financial investigation to gather all relevant facts about your money.
This will include the following:
- Income and expenditure
- Liabilities and assets
- Attitude, tolerance, and aptitude for risk.
Step 3: Evaluate your financial and personal data
In financial planning, a financial consultant will review the information you provided in the previous step and create a report reflecting your current financial situation.
The following ratios are calculated to help you better understand your financial situation and identify strengths and weaknesses:
- Debt service
- Solvency Ratio
- Ratio savings
- Liquidity rate.
In addition, a psychometrically constructed risk tolerance questionnaire on investment assets is used to assess your attitude, tolerance, and capacity for risk. This is also reviewed to see if your asset allocation is appropriate for your investment or retirement goals.
Personal Loans: The Best 15 InThe United States
Step 4: Create a financial plan and present it
The financial plan is created based on the data gathered and research. Each goal and objective should be addressed, with a proposal made for each.
It will include the following elements:
- A statement of net worth.
- Calculation of consolidated annual taxes.
- Annual cash flow report (showing surplus or deficit). The client and advisor sign the information after it has been delivered, explained, and discussed.
Step 5: Implementation, evaluation, and presentation of financial plan recommendations
What is the essence of writing a financial plan without implementation? This is another crucial step in the process of financial planning. However, as simple as it sounds, many people find implementing their programs the most challenging part. Even if you have a plan, implementing it requires discipline and motivation. You might start worrying about what will happen if you fail.
Inaction can turn into procrastination at this point. If the financial planner has implementation responsibilities, you’ll want to know about them, so you know what your financial planner is doing on your behalf.
Once the analysis and development of the plan are complete, the advisor will describe the recommended courses of action.
This may involve:
- Implement a new retirement or investment strategy.
- Change collection agent
- Supplemental life insurance or critical illness insurance.
- Adjustments to income and expenses
The advisor can implement the recommendations or act as a coach, managing the process with you and other specialists such as accountants and investment managers. They could also be responsible for dealing with sellers of financial products.
Step 7: Progress is tracked and updated
Plans, like life, evolve and change. The project becomes a piece of history once it is completed. This is why the strategy must be reviewed and modified regularly. Consider what may happen in your life, such as marriage, childbirth, career changes, etc.
These stages of life may require new perspectives or financial adjustments. Consider events or developments beyond your control, such as tax regulations, interest rates, inflation, stock market fluctuations, and economic downturns.
Your CFP will work with you to make sure your plan is on track to meet your goals and, if not, suggest improvements.
I have frequently asked questions about the financial planning process.
Financial advisors use different fee structures. Some charge a percentage of funds managed, while others charge a fixed fee. Some planners may use a hybrid of the two approaches.
Since financial planner works for a company or an individual, their main characteristic is loyalty to their client and not to the investment products.
You can create a financial plan yourself or hire the services of a professional financial planner.
However, if you create it yourself, the first step in financial planning is assessing your net worth and spending tendencies. Once that’s documented, you must look at long-term goals and devise strategies to smash them.
A financial program is meant to help you get the most out of your money and achieve long-term financial goals, like sending your kids to college, buying a bigger house, leaving an inheritance, or retiring comfortably.
Final Thoughts
I’ll end with these quotes from Mark Singer: “The biggest mistake most people make when it comes to their retirement is that they don’t plan for it. They walk the same path as Alice in the “Alice in Wonderland” story, in which the cat tells Alice that she will surely get somewhere as long as she walks long enough. It might differ from where you wanted to be, but you are getting somewhere.
Securing your financial future is essential, and having a financial plan will always serve as a guide throughout the financial planning process.
We hope this article has done justice to the stages of financial planning.
Health Technology( Making Advances in Medical Technology)
Why do my head itch, and my hair fall out?
ADHD in the Classroom: Helping Kids Succeed in School
Four tips to speed up a personal injury claim
The Financial Planning Process: A Step-by-Step Guide
