Guide to Financial Planning

Financial planning is the process of completing a comprehensive overview of your current financial situation, developing and determining your future goals, and then creating a workable financial management plan that puts you on the right path to actually achieving those goals.

In order to get a true, comprehensive plan with advice that helps you work toward wealth preservation and investing according to your risk tolerance and time line, you should work with a certified financial planner. However, to do a brief financial plan at home you can use this guide as well as the free, financial planning worksheet included.

Step 1: Review your current financial position.

Making an honest assessment of your current financial position is the first step in any financial planning process. To do this, complete sections 1-5 of our financial planning worksheet.

Your current financial position includes your assets, your liabilities, your net worth, and the efforts you have made to protect your net worth with insurance policies, tax-qualified accounts, trusts and a will.

Lastly, you must review your current monthly income and expenses. This will help you to determine whether or not your current income and expenses are appropriate for realizing future goals.

Step 2: Find and fix immediate issues.

You would be amazed at the problems you can find in your monthly budget and overall financial position once you complete your financial planning worksheet. Some aspects to consider:

• Is your debt to income ratio too high?
• Do your liabilities far outweigh your assets?
• Are you under or over insured?
• Are you taking advantage of tax-qualified retirement accounts?
• Are your retirement savings diversified? (You may need a professional planner’s assistance with this.)
• Are your non-retirement savings diversified? (You may need a professional planner’s assistance with this.)
• Do you make enough money to continue saving to achieve your goals?

There are many other important points to consider in this stage and you must be ready to do a little digging to find them. For instance, on the surface you might look at your debt to income ratio and be comfortable with the amount of debt you have but when you consider the amount of interest you will be paying out over the years to cover that debt does it change how you view the ratio?

Step 3: Determine financial priorities and goals—be specific.

In part 6 of the financial planning worksheet, you have a section for goals. Your future goals are the purpose for financial planning because the planning process allows you to review the financial decisions that you have already made, fix any problems, create a more financially efficient system and make your goals achievable.

There are 3 different types of goals to consider:

• Short-term goals: These are goals that you would like to realize within the next 3-5 years. Your age will help determine what they are. For instance, someone who is 60 may have a short-term goal of retirement whereas a 25 year old may have a short-term goal of buying a home.
• Mid-term goals: Your mid-term goals are those goals you would like to achieve within the next 5-15 years.
• Long-Term goals: Long-term goals are those goals you would like to achieve within 15 or more years.

When you write down your goals, you must be specific. Goals must have a deadline and a dollar amount in order to be planned for.

Next, you must prioritize your goals. Determine which are most important and make a commitment to focus your plan around realizing them. Prioritization is an overall activity, not something done within certain time limits so you may find that your long-term goals are much more important to you than your short-term goals.

Step 4: Determine whether your financial actions are supporting your goals and how to change.

Financial planning isn’t just about looking at your bottom line and understanding where you are in relation to where you want to be, it’s about creating a workable plan to get you from where you are to where you need to be according to your goals. This is the most difficult part of financial planning, especially if you are attempting to do so without the help of a professional planner because you might not be familiar with all the questions you should ask and all the investment and tax-efficient vehicles available to you.

Some points to keep in mind:

• Will aggressively paying off your debt help you achieve your goals?
• Do you need to cut your expenses in order to save more money?
• Are you saving money in the wrong types of accounts? For instance, if your most important goal is to create a lush retirement savings, then putting more money into a taxable brokerage account and not maxing out your IRA and 401k is a bad idea.
• If your goal is to retire in a short amount of time, are your retirement savings invested properly to help you do so? Are they invested to aggressively? Are they invested too conservatively?
• If your highest priority goal is the passage of wealth from you to your heirs, are you properly utilizing the tax-advantaged and creditor-safe trust options available to you? Have you created a will?

Step 5: Determine how to support your goals by creating your plan.

The last step is to create your plan for effecting change. To do this:

• Make a list of the accounts you need to open to start saving properly for your plan.
• Adjust your monthly spending in order to create more room in your budget for debt repayment, savings, or higher insurance premiums.
• Open the appropriate trust accounts for tax savings and wealth preservation.
• Work with an attorney to create a will.
• Open the appropriate college savings accounts for your children.

It is important that this guide does not undermine the level of assistance a certified financial planner can give. We cannot give advice about what type of risk tolerance you have, what types of retirement accounts or investment accounts you should open, and what type of trust best suits your financial plan.

You may also enjoy How to Budget.