Understanding the Seven Steps of Financial Planning
An individual without a proper financial plan runs the risk of mismanaging their finances. A well-structured financial plan provides clarity on the person’s financial state and helps both low and high-income earners effectively maximize their assets. Income earners may develop their financial plans independently or rely on the expertise of a certified financial planner.
Financial planning could come down to seven simple steps. These steps primarily cover the preliminary assessment of financial standing, the setting of new financial goals, and the execution of these goals.
The financial planning process typically begins with a thorough assessment of finances and prevailing life circumstances. An individual undertaking the process must first outline their lifestyle and financial mindset to identify areas needing adjustment and develop corresponding financial goals. Certified financial planners approach initial financial assessment by presenting their clients with open-ended questions about their financial behavior and priorities.
Second, individuals must ascertain new financial goals from their initial assessment. Individuals and financial planners may approach this step by formulating and answering a narrower set of questions to yield specific, measurable, realistic, and time-bound goals. However, income earners should view the goals derived by this stage as preliminary and subject to adjustments. They must also consider their risk tolerance in the goal-setting stage.
An individual must also assess their prevailing financial decisions in the financial planning process. They must highlight these decisions and determine how effective they are in achieving the newly proposed goals. These decisions primarily cut across expenditure, savings, and investments. For example, a low-income earner may discover that their monthly earnings and savings are incompatible with the long-term goal of owning a home or setting up a retirement fund. Once a person identifies a discrepancy between a financial practice and a set goal, they must adopt better lifestyle choices that help them accomplish their goal.
The fourth step involves an individual or certified financial planner preparing a set of recommendations geared towards actualizing the desired financial goals. These recommendations are the alternative courses of action that appear to be most effective in reaching the proposed financial goals. In line with the need to maximize income, recommendations may include job changes, asset sales, and exploring new investment opportunities.
Furthermore, individuals and certified financial planners must present their recommendations for external review. While this stage applies more to certified financial planners, income earners may also show their recommendations to close associates and family members for review. Multiple perspectives emerge from this stage and shape the final plan.
Executing recommendations is a sensitive aspect of financial planning and requires utmost dedication by the individual involved. Income earners must commit to the plan and keep track of their decisions at monthly, quarterly and annual intervals. Without tracking, individuals can easily relapse to the less desirable saving and investment habits they seek to overcome and delay achieving their desired financial goals.
Finally, individuals involved in the financial planning process must critically evaluate their progress in light of factors beyond personal control. These factors include law and policy changes and inflation and economic recessions. Less drastic factors like time can also render a plan outdated and necessitate amendments. When such external factors seem likely to impede the actualization of a financial plan, individuals and certified financial planners must amend and overhaul the plan.
