The Financial Planning Process

The financial planning process is very similar to the research and financial analysis processes uses by professionals in a variety of industries, including my own. According to the Certified Financial Planning Board of Standards, the financial planning process includes six steps.

Despite the fact that the CFP has already defined these steps, I am going to tweak my description of the financial planning process in order to provide you the most relevant explanation. The steps of the financial planning process should serve as the basis for creating a financial plan.

Determining Stakeholders

Your financial plan’s stakeholders are anyone whom is effected by the financial and life decisions that you make. These are usually your family and dependents. When you are developing your financial plan its important to understand and communicate what changes are needed and actions taken. One example that I always seem to use to explain this situation is getting the spouse and children on board when it comes to creating a financial plan.

Sometimes it can be a challenge to take the time to sit down and talk about money and expectations with those so dear to you. However in doing so it can save a lot of conflict in the long run as everyone will be on the same page and striving towards the same goals. This also helps to ensure the financial plan is not undermined during its implementation.

Gathering Data and Defining Goals

The next step in the financial planning process is to gather all of your financial data and defining your life’s goals. Financial data comes in all forms and from a variety of sources. Some of the most common sources of financial data includes bank and investment account statements, prior tax returns, estate planning documents like wills, insurance policy documents and retirement plan data.

This step in the financial planning process also includes the development of goals. This can easily be described as making a list of what things your life stands for and what you want to accomplish.

Analyzing and Evaluating Financial Data

Financial data can be analyzed and evaluated many different ways, however the most common is to create an Income Statement and Statement of Net Worth. These two documents will allow you to calculate your income, expenses, savings, assets and liabilities.

Knowing this basic information enables you to evaluate your current financial situation, determine if your cash outflows are sustainable, savings are adequate and other financial planning elements (estate plan, insurance coverage, investments, etc.) are in good standing. If your financial plan needs a little work, they are called “gaps”. These are the areas in your financial plan that you should focus on improving.

Developing Courses of Action

Once you have found the gaps in your financial plan, use this step to determine a few different ways in which you can “close the gaps” or at least mitigate some of the financial risk that they expose you to.

Two of the most common gaps include not enough savings and insurance coverage. Unfortunately closing these two gaps usually involves reducing monthly expenses in-order to save more money and pay a larger insurance premium. Be sure to look at your options and remember cutting a little budget to increase your chances of financial success is a wise and prudent decision.

Implementing the Financial Plan

Now that you have determined your financial plan’s gaps and found a few different ways to close them, its time to implement. Just like any project, idea or program the implementation is the hardest part. This is the point in time when motivation and discipline are needed most. This is due to the fact that you have to live your plan, everyday.

Some compare budgeting to dieting, and frankly I agree with them! If you want to improve your health you diet and change your habits. In order to change your financial future you might have to give up some of the things that you enjoy today in-order to enjoy them in the future.

Monitor The Plan and Results

Once you have implemented your financial plan, its time to monitor it and ensure you stay on track. During this enduring stage you will need to ensure that you recalculate your financial statements regularly. This will allow you to assess your financial situation and adjust according to your goals and objectives. There are tons of software that will do this for you for free. I will post about those at a later time.

I know that this was a really long post and that I could have explained the financial planning process in a shorter article, however I think this will show you how a financial planner thinks. If you have any questions or comments please don’t hesitate to leave them in the comments below.