The Financial Planning Process: Step-by-Step Guide

Mastering the financial planning process is essential for both parents, businesses, and individuals.

Do you want to be able to afford the things you want, when you want, and in the way you want? Do you wish to achieve your long-term goals, such as college savings and retirement planning?

It was Alan Lakein that 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 create long-term wealth. Having a financial plan and being disciplined to it will enable you to crush your financial goals.

So in this article, we’ll discuss the steps in financial planning to enable you to know the financial planning process and procedures so 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 the act of establishing precise goals for your money as well as determining how to channel your funds into numerous plans ranging from savings and investment, spending plans, emergencies, and everything else related to your finances.

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What Are The Roles Of A Financial Planner?

Financial planners deploy their knowledge and expertise to aid the financial planning process by determining the life plan of a person or firm. 

A financial planner’s primary purpose is to assist clients in recognizing their financial planning needs, present objectives, and investment programs that will help them meet their financial needs. As a result, a financial planner has a thorough understanding of a wide range of tools and products that are needed for financial planning. Their major role, however, is to assist clients in selecting the best product for their specific needs.

What Is The Objective Of Financial Planning?

Some of the goals of establishing a financial strategy are as follows:

1. To Ensure the Availability of Funds When Required

The entire notion behind financial planning is to create funds and make them available to the investor when they are required. As a result, financial planning is aimed at ensuring that finances are accessible to meet diverse needs, and a sound financial plan ensures that such goals are met.

2. To Create the Capital Structure

The capital structure is primarily made up of the company’s capital, which is the quantity and type of capital required in every business. This structure includes both long-term and short-term debt-equity ratio planning.

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3. Avoiding Shortage of Funds

Another crucial goal for every company is to avoid raising excessive funds. Companies will always struggle to pay their staff when money is scarce.

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On the other hand, with additional finances, the company is better able to produce returns, pay its employees, and properly run the company.

4. Provide Time and Source of Fund Estimation:

Time is of great significance for any business so, delivering the right fund at the right place at the right time is crucial for every business. It is as important as the amount generated in itself. However, where time is a crucial factor the source from where these funds come from must also be put into consideration.

Factors to Consider Before Drafting a Financial Plan

Before creating a financial plan, there are a few things to think about. Now, it’s also worthy to note that there is no set format for financial plans.

A licensed financial planner can carry you through the financial planning process to ensure that you establish a plan that is tailored to your needs and objectives. Once completed, it may spur you into making short-term improvements that will aid in a seamless transition through life’s financial stages.

The elements listed below should be revised and addressed as needed:

Risk management plan: This covers an examination of life and disability insurance, personal liability insurance, property and casualty insurance, and catastrophic coverage.

Retirement approach: Regardless of your priorities, your plan should contain a strategy for accumulating the necessary retirement income.

Estate planning: Entails to make arrangements for the benefit and protection of your beneficiaries.

Tax reduction strategy: A strategy for lowering personal income taxes to the degree permitted by the tax code.

Long-term investment strategy: A tailored strategy based on specific investment goals and a risk tolerance profile.

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Importance Of Financial Planning

All the various steps in financial planning are aimed at establishing a company’s long-term financial objectives, and its strategy, budget plans, policies, and projects. As a result, the corporation ensures pleasant and realistic financial investment policies.

The following are some of the reasons why financial planning is important:

  • Financial planning assists in ensuring harmony between the incoming and outgoing assets to maintain stability.
  • It ensures sufficient funding.
  • This planning also aids in the expansion and development of programs that support the long-term organization’s substances.
  • Financial planning also aids in the reduction of vulnerabilities that can act as a support in the development of the organization. This contributes to the company’s assurance of benefits and security.
  • Furthermore, with sufficient funding, the organization will be in a better position to deal with this scenario.
  • Financial planning aids in maintaining a healthy balance of expenses and income.
  • The strategy assists in managing cash flow and, as a result, avoids unnecessary spending.
  • Contributes to the formation of a corpus and the improvement of savings.
  • It maximizes investment returns.
  • It lowers one’s tax liability.
  • Financial planning helps in generating wealth and ensures that one has superior wealth management to achieve life goals.
  • Finally, financial planning ensures financial security after retirement. 

Now that you’ve known what financial planning is, and the importance of financial planning, let’s look at steps in financial planning.

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What Are The Steps Involved In Financial Planning?

Since financial planning is a crucial part of helping companies grow and helping individuals meet their financial goals, below are the steps in financial planning:

Step 1: Define and decide on your financial objectives and ambitions.

The financial plan’s goals and objectives will serve as a guide, and they should serve as a roadmap for your financial future. Here’s an outline of things you need to take into consideration:

  • They should be measurable, attainable, and easy to understand.
  • Make a distinction between your needs and your wants.
  • To help you maintain track of your progress, they should be agreed upon and documented with your financial consultant.
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The Financial planning professionals start the financial planning process by asking their clients questions to acquire a better understanding of who they are and what they want.

Some of the questions are qualitative, and they help the client better understand his or her health, family relationships, values, earning potential, risk tolerance, objectives, requirements, priorities, and present financial situation.

If it’s a business, the queries should focus on the client’s income, expenses, cash flow, savings, assets, liabilities, liquidity, taxes, employee and government perks, insurance coverage, and estate plans.

The advisor may use open-ended inquiries to obtain the information needed to begin the strategy. This information could range from financial goals to thoughts about market risk to fantasies about retiring in the Caribbean.

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Step 2: Identify and Select Goals

This is one of the critical steps in financial planning because your financial goals will determine financial attainment. Here professionals will deploy their financial expertise to assist their clients in selecting and defining a goal. They will ask clarifying questions to aid in the identification of those goals.

For example, What is the time frame for achieving those objectives? What is your risk tolerance? Are you ready to take a high relative market risk to attain your financial goals, or would a conservative portfolio be a better alternative for you?

The financial advisor and the client will decide which goals are most significant based on the quality and clarity of the information supplied by you. Your consultant will do a thorough financial fact-finding to gather all pertinent facts about your money.

This will include the following:

  • Income and expenses
  • Liabilities and assets
  • Attitude, tolerance, and risk aptitude.

Step 3: Evaluate your financial and personal details

In the financial planning process, a financial consultant will go over the information you gave them in the previous stage and create a report that reflects your current financial situation.

The following ratios are calculated to help you better understand your financial situation and identify areas of strength and weakness:

  • Debt Service
  • Ratio Solvency
  • Ratio Savings
  • Liquidity Ratio.

In addition, a psychometrically constructed risk tolerance questionnaire about investment assets is used to assess your attitude, tolerance, and capacity for risk. This is also looked at to see if your asset allocation is appropriate for your investing or pension goals.

Step 4: Create a Financial Plan and Present it

The financial plan is created based on the data gathered and the research performed. Each of the goals and objectives mentioned should be addressed, with a proposal made for each.

It will comprise the following:

  • A statement of net worth.
  • Calculation of annual consolidated taxes.
  • Report on annual cash flow (displaying surplus or deficit). Both the client and the adviser sign the report after it is delivered, explained, and debated.

Step 5: Implementation, evaluation, and presentation of financial plan recommendations

What is the essence of drafting a financial plan without implementation, this is another important step in the financial planning process. However, as straightforward as this sounds, many people discover that putting their plans into action is the hardest part of the process. Even if you have a plan in place, putting it into action requires discipline and motivation. You could start to worry 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.

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Once the analysis and development of the plan are complete, the adviser will outline the recommended courses of action.

This may entail:

  • Putting in place a new pension or investing strategy.
  • Changing debt collectors
  • Additional life insurance or critical illness insurance.
  • Adjustments to income and expenses

The Adviser may implement the recommendations or act as your coach, managing the process with you and other specialists like accountants and investment managers. They could also be in charge of dealing with financial product vendors.

Step 7: Progress is being tracked and updated

Plans like life, evolve and change. The plan becomes a piece of history once it is completed. This is why the strategy must be examined and changed regularly. Consider what can happen in your life, such as marriage, childbirth, career changes, and so on.

These life milestones may necessitate new viewpoints or financial adjustments. Consider occurrences or developments that are beyond your control, such as tax regulations, interest rates, inflation, stock market swings, and economic downturns.

Your CFP will work with you to make sure your plan is on track to accomplish your objectives, and if it isn’t, they’ll suggest improvements.

Frequently Asked Questions On Financial Planning Process

How much does a financial advisor charge?

Different fee structures are used by financial advisors. Some charge a percentage of the funds managed, while others charge a fixed fee. Some planners may employ a hybrid of the two approaches.

What are the qualities of a good financial planner?

Since a financial planner works for a company or an individual. Their primary characteristic is to be loyal to their client, not to investment products.

How do I write a financial plan?

You can create a financial plan on your own or hire the services of a professional financial planner.

However, if you choose to create it yourself, the first step in the financial planning process is to evaluate your net worth and determine your spending tendencies. Once this is documented, you should examine long-term goals and devise strategies to crush them.

What is the purpose of a financial plan?

A financial program is meant to assist you in making the most of your money and achieving long-term financial goals, such as sending your children to college, purchasing a larger home, leaving a legacy, or retiring comfortably.

Final Thoughts

I’ll wrap it up with these phrases by Mark Singer: “I believe that the biggest mistake that most people make when it comes to their retirement is they do not plan for it. They take the same route as Alice in the story from “Alice in Wonderland,” in which the cat tells Alice that surely, she will get somewhere as long as she walks long enough. It may not be exactly where you wanted to get to, but you certainly get somewhere.”

Securing your financial future is critical and having a financial plan will always stand as a guide through the financial planning process.

We hope this article has done justice to the steps in financial planning.

Cheers to a bigger you!!!


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