An Overview of the Financial Planning Process

Step 1: Identify, establish, and prioritize goals.

Financial Planning is about achieving your hopes and dreams: a comfortable retirement, paying for your children’s education, buying a home, providing for loved ones, charitable pursuits, and so on.  Think long and hard about what you want to accomplish in life and how your finances might play a role. 

This part of the process also involves a rigorous self-assessment of your personality and tolerance for putting you finances at risk.  Because specific goals are usually tied to a certain point in the future, this step will also help establish your time horizons.

Step 2: Gather Personal and Financial Data

Your present circumstances will have a significant impact on the plan that’s best for you.  Start by collecting all your bank and brokerage statements, insurance policies, estate documents, and maybe even your most recent tax returns.  List your assets (what you own) as well as your liabilities (what you owe).  You’ll also need to gather up a record of all sources of income and expenses, and anything else you can think of related to your finances.

Step 3: Analyze the Data

Here's where you start to form a coherent picture of where you are financially.  For example, your portfolio's current asset allocation will emerge from your brokerage and retirement account statements. At this stage, you'll create a personal net worth statement and a statement of annual cash flows.  You'll also analyze the adequacy of your estate plan, account titling, beneficiary designations and insurance coverage.  As the picture develops, specific shortfalls or excesses will come into focus, along with areas you need to change. 


Step 4: Create a Plan

Now you're ready to lay out the roadmap that will help you accomplish your goals, given your risk tolerance and time frames.  Your plan may call for immediate changes, such as diversifying your investments, shifting your asset allocation, consolidating accounts, optimizing your insurance coverage, or drafting wills and other estate planning documents.  Your plan may also call for longer-term actions such as altering your spending and saving habits over time.

Step 5: Implement the Plan

Here's where the rubber meets the road; financial planning isn’t meant to be an academic exercise, after all.  The plan you created in Step 4 is meaningless if you don't act on it.  You might be surprised, for example, at how many people pay to have trusts created and never get around to actually funding them. Implementing your plan may involve opening certain types of accounts or purchasing certain types of securities, policies, funds or other financial and investment-related products.  Suitability and performance are key here, of course.  But remember, you can potentially boost the overall, long-term performance of your investments by keeping costs and expenses as low as possible

Step 6: Monitor and Review the Plan

This involves keeping an eye on the performance of your investments, periodically rebalancing your portfolio to keep your asset allocation on target, updating your insurance and your estate plan, and so on.  In the absence of a major event in your life (marriage, divorce, newborn, job loss, disability, etc.), once or twice annually should be sufficient.