financial planning process

Monitoring a Financial Plan

The last step of the financial planning process involves monitoring the financial plan’s implementation and progress towards meeting goals and objectives. It should be no surprise that the world that we live in constantly changes. Due to these changes, its important to ensure that our financial plans are up to date.

Financial planning is an ongoing process that entails defining goals, gathering data, measuring progress and changing course when necessary. Financial plans should be considered a “living document”, which means that it is continually edited and updated. This ensures that the recommendations that you have implemented are still relevant and needed to help you reach your goals.

Financial Planning is a Ongoing Process

The elements of personal finance have the tendency to change, some more than others. A minor change in one of these elements (budgets, investments, financial risks, estate plan, etc.) can severely impact your ability to meet your financial planning and life goals.

To ensure that minor changes in your life are incorporated into your financial plan, its recommended to review and revise your plan at least annually. In the best case scenario a financial plan would be revised upon realizing that some facts or assumptions in your financial plan have changed.

Monitor These Financial Planning Elements

Implementation of Recommendations - A financial plan only works if its implemented correctly. When reviewing your financial plan, ensure that all feasible recommendations have been executed on time. This includes changes to your budget, risk management, savings, investments and estate plan.

Cash Flow and Budget - Our budgets have the tendency to change from month to month. Monitor your financial plan to ensure that income and expenses haven’t changed enough to jeopardize your success. This also includes reviewing debt levels and the trends of other liabilities. Its a good idea to consistently monitor the use of credit cards and other lines of consumer credit.

Risk Management and Insurance - Reviewing our risk management strategy ensures that our current insurance coverage is adequate. Changes in lifestyle, home value and other financial planning elements can effect whether you have the right coverage. Its also a good idea to shop around for new insurance deals once in a while. This can help lower your expenses.

Savings and Investments - Financial markets are in a constant state of flux. Assumptions, such as expected investment returns, have a huge impact on retirement planning and the accomplishment of our other goals. Ensure that your savings and investments are performing well (relative to the broad market). You many need to change your asset allocation, increase liquidity through asset sales or increase your savings rate.

Monitoring a financial plan will help ensure that changes in personal circumstances, financial markets and our lives in general will not impact our ability to reach our financial goals. Financial plans are “living documents” that should be revised as often as necessary in order to remain relevant.

Simple Cash Flow Planning Options

When creating a financial plan, sometimes it becomes necessary that we change our current cash flow situation. This can occur due to discovering that we do not have the cash flow required to reach our short and long term goals.

Unfortunately, most of us don’t make this change until its already too late. Having the information necessary to make sound financial decisions, before you are negatively impacted, is one of the greatest benefits of the financial planning process. So if you have already determined that you need to develop a few cash flow improvement strategies, the following ideas should help.

Leverage Existing Financial Opportunities

During the financial planning process, you might come across some opportunities that you can leverage to increase your cash flow. The following are some common ways to save money and improve your financial situation.

Debt Restructuring - If you have loans such as credit cards, mortgages and personal lines of credit, sometime its advantageous to consolidate these liabilities to a lower interest rate. Depending on the terms of your mortgage, you could significantly increase your cash flow by refinancing to a lower rate.

Employee Benefit Plans - Most employers offer benefit packages that include 401(k) contributions, IRAs and Flexible Spending Accounts that allow you to leverage before tax dollars. This reduces your tax liability and increases your cash flow without the need to reduce retirement plan contributions or current health care benefits.

Re-prioritize Goals and Objectives

More often than not, our current financial situation causes us to rethink our life’s goals and objectives. One of the most common compromises that we must make is to work longer than we wanted. Making the decision to retire later than desired is not a easy decision to make, however if enough money was not saved or investment assumptions were not accurate this might be the only option. In addition there are some other changes that can be made such as sending the kids to a State College verses a Private University and delaying large purchases.

Lifestyle Changes

Executing the option to change your lifestyle is not as simple as leveraging existing opportunities and re-prioritizing goals and objectives, however our lifestyle is usually the number one cause of our personal financial problems. It’s human to place more value on consumption today than consumption in the future. This is an adapted version of the time value of money, yet it’s still extremely accurate.

Changing our lifestyles sometimes entails buying a less expensive vehicle than we want, not going out to dinner so often or opting for a local vacation verses one in the Caribbean. Making changes such as these are compromises, but sometimes they are the only way we can reach financial freedom and our goals and objectives.

I hope this information provides you with some ideas that will help you increase your cash flow and improve your financial situation. Changing our habits, behaviors and lifestyle is easier said than done. However we are extremely adaptable and if you plan well and put your mind to it you can accomplish success in anything that you do.

Gathering Quantitative Financial Planning Data

Gathering quantitative financial planning data is usually easier than determining the qualitative portion of a financial plan. This is due to the fact that financial quantitative data is usually objective and is not subject to personal opinion; so in short, the numbers are the numbers.

The following list of financial data will help you complete step two of the financial planning process. Some financial plans require more data than others. Once the data collection phase is complete, you will need to organize your financial planning data. This information will help determine your current financial situation and what you will need to do in order to meet your financial planning goals and objectives.

Financial Data and Documentation

Most of the financial planning data that you will need can easily be found online. This is due to the fact that many financial service companies have embraced technology for the delivery of financial information (it saves them money). Anyway the following data elements play a key role in the financial planning process.

Salary and Income Data - In order to create your income statement and forecast future earnings you will need to locate your salary and income data. You can usually find it on your paycheck stubs, bank account statements or employment contracts.

Checking and Savings Accounts - Calculating your statement of financial position, retirement needs and savings requires understanding current cash levels. This data can be found on your most recent bank statements.

Brokerage and Retirement Accounts - In addition to understanding how much cash is on hand, financial advisors will need to know what other assets and holdings you own. This includes all of your current stocks, bonds, options, etc. Your statement should include when you purchased the asset, how much you originally invested and it’s current value. These are all important data points.

Mortgages, Notes and Loans - The other half of the statement of financial position includes a total of your liabilities. This entails finding all of the data about your debt, loans and mortgages. Your bank statements will usually include all of this information, however getting ahold of your mortgage escrow statement can also be helpful.

Historical Tax Returns - Tax returns hold a lot of the data that you can use to determine income and tax rates, provided that they are accurate. Your tax returns can help determine trends in your income, asset and tax levels and help forecast your future financial needs.

Insurance Information - Collecting insurance information (life, vehicle, real estate, health, etc.) will help determine if you have the right coverage and if your rates are fair and competitive.

Estate Planning Data - Finally you should collect all of the estate planning data that you have. This includes trusts, wills, and other estate related data.

Now that you have collect all of the financial planning data that you need, its time to create your financial planning statements. This is the first step of the financial analysis portion of the financial planning process.

Gathering Qualitative Financial Planning Data

The second step in the financial planning process is gathering financial data. Data, for purposes of financial planning, comes in two forms; quantitative and qualitative.

When gathering the needed information keep in mind that the more information that you have the more robust your financial plan will be. This is due to the fact that the more data that is available the better analysis that we can conduct.

It also should go without saying that if the financial planning analysis is robust the derived information and decision made from it should be of great quality. The following is a list of qualitative data that you should gather as you start your financial plan.

Qualitative Financial Planning Information

You can choose to start gathering qualitative data as part of the financial planning goal setting process in step one. Depending on how comprehensive you would like your financial plan to be, the following list of qualitative information should get you headed in the right direction.

List of Goals and Objectives - Step one in the financial planning process is to list your financial planning goals and objectives. Initially focus on your life goals and then determine what resources you will need to accomplish them (financial needs).

Risk Tolerance Assessment - Your optimal investment strategy heavily depends on your personal preference towards the relationship between risk and reward. Take some time and think about how much capital you are willing to risk losing. This will help determine your risk tolerance.

Past Experiences with Money - In addition to risk tolerance, our past experiences with money can affect our preference towards various financial instruments and capital allocation strategies. This information will help shape your financial plan's content and ensure that it is aligned with your personal preferences.

Feelings Towards Investment Products - Usually by the time we sit down and create a financial plan, we already have some experience and biases towards different investment products. These can be good or bad experiences concerning stocks, bonds, annuities, insurance or options.

Career Stability - When creating a financial plan, considerations concerning career security is an important assumption. We need to be able to plan for all potential scenarios that could impact financial solvency in both the short and long run.

Life, Education and Retirement Expectations - This information can be included in the goal setting step, however understanding what your family’s expectations are is extremely important. In addition understanding expectations can help when attempting to prioritize financial planning goals and objectives.

Financial Management and Budget Issues - Try to think of the financial planning process as a chance to start fresh. With that said, if there has been poor budget decisions or less than optimal financial management in the past, its time to get it all out on the table, learn from it and move on.

When I started writing this post is was going to be about the entire financial planning data gathering process. However based on the length of the qualitative section, I decided to break it into two parts. In any case, I hope this information helps you gain financial freedom.

Goals and Expectations of Financial Planning

I can remember talking to family and friends when I first started my financial planning education. One of the most challenging questions that I received was "how much money can I make". The first time I heard it I quickly tried to find the answer as I wanted to know it myself.

However, over time (and after finishing my financial planning education) I have realized that financial planning’s main focus should not be placed on growing wealth for wealth’s sake. Money is a tool, a tool that we use to acquire the things we need and want. Wealth can lead to happiness but only through the freedom that it provides. With that said we have to understand the goal of financial planning and its limitations.

Financial Planning Alone Does Not Make Millionaires

There are many variables that go into the success of a financial plan. Ultimately financial success is earned by the client not the financial planner. This is due to the fact that the control of how a financial plan implemented is an individual’s choice. The simple decisions that we make every day usually have the largest impact on our financial future. These little decisions can also be described as our behaviors.

In addition income, expenses, debt and life style choices impact one’s ability to achieve financial freedom. The financial plan is the road map that can get you there, if it is followed. The decision to follow it rests solely with you.

Financial Plans Include Many Assumptions

Financial Planning is a complex and challenging exercise (and profession for that matter). If you have read some of my other posts then you would know that a comprehensive financial planning includes portfolio management, retirement planning, estate planning, tax planning, risk management and life planning. Each one of these elements alone has many contingent factors and laws that impact the outcome of the decision.

Consider attempting to get all of these elements to work together harmoniously. It is due to all of these factors that financial planners are forced to make calculated assumptions about the future. Some assumptions for example include stock market performance, tax law changes, retirement account regulation, inflation rates and potential future financial liabilities. All of these affect the outcome of even the best financial plan.

Implementing a Financial Plan is Hard Work

A financial plan, by itself, will not improve a financial situation. The most challenging part of the financial planning process is the implementation. This is due to the fact that often there are some behaviors that have to be modified in order for the plan to actually work.

Our behaviors, especially the older we get, are difficult to change. Achieving financial freedom is difficult; your expectations when getting started in the financial planning process should be adjusted accordingly.

Probably the most difficult part of implementing a financial plan is the sacrifices that most must make. Many of us live beyond our means; this is especially true when you account for a lack of savings and investments. To ensure that you are ready to implement a financial plan I recommend mentality preparing for the journey ahead.

I hope this article clearly articulates the variables that can affect the outcome of a financial plan. Understanding the assumptions that go into a financial plan and the hard work that’s needed to implement it is extremely important.