Americans today have more ways to start investing and saving than ever before. From registering with online brokerages to investing in new financial products, there is almost a curse of abundance. How do you know what works when there are so many options available?
A firm understanding of the financial planning process helps. But many investors don’t understand this process and even fewer have a financial plan. According to a recent Schwab survey, only 36% of Americans have a financial plan. And this is critical because a plan does much more than list your investment options.
Financial planning is the backbone of your budget, retirement savings, and other key life milestones. These blueprints help you determine how much risk is acceptable, what investments make sense for your goals, and what expenses you can handle. The financial planning process is a proven way to get your finances in check.
Designing a financial plan with an advisor is often a more convenient and comprehensive process. But you can get started on your own, too. This 9-step guide will help you understand the steps in the financial planning process and help you achieve financial security.
Key Takeaways
- The financial planning process acts as a roadmap for achieving personal financial goals, managing risk, and navigating major life events, such as retirement. It helps set clear objectives, prioritize spending and savings, and keeps individuals on track for long-term success.
- Working with a fiduciary financial advisor can help address complex financial decisions with objective advice, including tax optimization, retirement strategies, and investment alignment with individual risk tolerance, ultimately leading to greater confidence and stability.
- Financial planning is a dynamic, ongoing process that requires regular monitoring and adjustments to stay aligned with life changes, market fluctuations, and evolving goals. This flexibility ensures that the plan remains relevant and effective over time.
Step 1: Understanding the Financial Planning Process
Before diving into how to develop your financial plan, we must better define what a plan contains.
What is Financial Planning?
Financial planning is more than drafting a budget. It is a comprehensive process that helps individuals or businesses align their long-term financial future with their current finances. It often involves creating a personalized plan that includes your income, assets, investments, savings, and risk tolerance.
In other words, a financial plan is a roadmap that guides financial decisions and helps you make long-term progress. Like any good roadmap, it allows you to monitor progress, stay on track, and make mid-course corrections if needed.
Step 2: Setting Financial Goals
The first part of financial planning is to set the right goal, which can differ per generation and life milestone. For instance, 46% of millennials entering a mid-career stage in 2024 want financial independence, whereas 34% of baby boomers want to become financially stronger.
If you don’t know what your goals are, then you can almost guarantee that you won’t get there – wherever “there” may be. All roadmaps – physical or financial – require a beginning and end point. It’s essential to identify your short-term and long-term financial goals, which often include things like:
- Investing for retirement
- Saving for a child's education
- Paying off debt
- Building an emergency fund
- Buying a vacation home
- Moving abroad
But that’s not all. You’ll also want to consider less tangible but no less important goals, such as general financial independence, security, and peace of mind.
Creating a practical plan to achieve your financial priorities is much easier once you determine your financial priorities.
Step 3: Assessing Your Financial Situation
The first step is to gather all relevant documentation. Examples of key documents include:
- Tax returns
- Pay stubs
- Social security statements
- Monthly budget
- Financial statements from retirement or brokerage accounts
- Annuities statements
- Insurance policies
- Mortgage year-end statements
- Student loans
- Loan and credit card debt
It can then be helpful to organize these documents in a standardized system that can be easily understood by you and your family members, spouses, and your financial advisor.
At this point, it’s possible to assess your current financial situation. Generally, this will take the form of summarizing your income, expenses, assets, debts, and forecasted cash flow.
Step 4: Creating a Personalized Financial Plan
Once all your documentation is in order and there is a general assessment of your financial situation, it’s possible to draft a robust financial plan. At this point, we are looking at more than income and debt. We’re also considering your goals, risk tolerance, and projected changes to your financial situation.
A good plan is comprehensive; it will include strategies for saving money, investing those savings, and managing the risks to your financial situation.
Let’s consider this example:
Ashley
Ashley is a 29-year-old professional with a $80,000 salary looking to save for retirement. However, she has $10,000 in high-interest debt and $30,000 left on her student loan. A potential plan may recommend paying down the high-interest debt over the next three years, putting a minimum amount into her employer-matching 401(k). After the debt is paid off, those funds may be freed for dumping lump sums into a new Roth IRA and increasing 401(k) savings.
Michael
Michael, however, is 67 and looking to retire. He has $2 million in retirement savings. He wants to make his funds last as long as possible while also paying for his daughter’s upcoming wedding. His plan may include tax optimization for income, as well as how much to save or contribute towards wedding expenses without breaking the bank.
As the scope for financial planning is often comprehensive and labor-intensive, it helps to create a personalized plan with a financial planner or advisor. Advisors often provide insight into the financial market and can help you develop ways to mitigate risk in your portfolio.
While online tools can help get you started, they rarely provide the type of accurate and comprehensive plan needed to achieve most financial goals successfully. There’s just too much complexity between the inevitable conflicts between goals, the investment options available, the vagaries of tax law, and the different financial risks we face.
An experienced financial advisor understands these issues and the tradeoffs to be made. A fiduciary financial advisor will also have access to the more sophisticated planning software that is available online or the typical one-size-fits-all programs that commission-based financial sales reps use to pitch financial products.
Step 5: Implementing Your Financial Plan
After the financial plan is drafted, all that’s left is to execute it. You can start implementing your financial plan by taking small steps toward your goals. There are many ways to make this process effortless, such as automating your savings and investments to make progress toward objectives.
This is also where a fiduciary financial advisor can help tremendously. Fiduciaries do not sell products; they are not motivated to earn a commission. They are dedicated by law to acting only in the client’s best interest. Accordingly, fiduciary advisors are 100% objective and will help you implement your plan using only the best financial products for you and your goals.
Step 6: Monitoring and Adjusting Your Plan
The best way to follow your financial plan is to review it regularly. You’ll want to look at it every 2-3 years to ensure you’re on track to meet your goals. Ideally, you’ll also adapt your plan to reflect changes in your financial situation or long-term goals during this time.
Objectivity, Predictability, and Accountability
However, reviewing your investment performance is also important. An investment plan is a component of your overall financial plan. You must incorporate three key principles: objectivity, predictability, and accountability.
Objectivity: make sure the investment plan is developed by an advisor who is 100% objective (a fiduciary) and not trying to just sell you a financial product.
Predictability: make sure the investment plan doesn’t just use terms like “conservative,” “moderate,” or “aggressive.” These are meaningless because they mean different things to different people. Instead, the investment plan should provide a reasonable and specific target return – like “the goal is to earn an 8.25% average annual return.” That’s predictable.
Accountability: investment performance should be measured specifically against the target return. That’s the only way to know whether you are progressing in accomplishing your overall financial plan.
Because the market is volatile and can change rapidly, you won’t earn your target return every single year. In some years, you’ll probably be above the target, while in other years, you’ll probably be below the target. The key is whether the long-term trend is on pace to achieve the average annual target.
It’s best practice to review investments against their specific goal at least annually. Still, the larger and/or more complicated the portfolio, the more frequently it should be reviewed by your advisor. Keeping a pulse on your investments will make adapting your plan to changes and mitigating losses easier.
Step 7: Overcoming Challenges in the Financial Planning Process
A financial plan is essential to success, but it has its own set of challenges. Financial stress and procrastination during savings and investments can result in common pitfalls. For example, you may withdraw from certain accounts too early due to unexpected financial changes, resulting in unexpected fees or tax penalties.
Procrastination is another extremely common problem. If you wait too long to start saving, it becomes difficult to meet retirement goals. Many strategies depend on the principles of compounding to grow investment value.
For these reasons, it is important to develop strategies to overcome these challenges ahead of time. This can include breaking down goals into smaller steps, automating investment deposits, or working with a financial planner to discover new solutions.
Step 8: Be Cautious In Using Financial Planning Tools and Resources
Technology is great—until it isn’t. There are many exciting financial planning tools, such as budgeting software and apps, to help you gain perspective. However, these are rarely personalized. It’s important to remember that these are often canned or pre-programmed recommendations, which may not apply to your unique situation.
As discussed above, a fiduciary financial advisor will have access to more sophisticated and personalized planning tools. Consider working with such a financial advisor to access their 100% objective expertise and guidance. Technology and online tools will only take you so far. While they can be fantastic for increasing financial literacy and making it much easier to discuss finances, they can never handle everything needed for a successful, comprehensive financial plan.
Step 9: Celebrate Financial Success Along The Way
Once you’ve developed and implemented your financial plan and regularly monitoring it, don’t forget to celebrate the little wins. Even on the road to complete long-term financial success, there will be little setbacks. These can be discouraging. But there will also be successes, and celebrating them helps you stay true to your plan when the hiccups occur.
To that end, it helps to budget a small “celebratory” fund for dinners, vacations, and other activities to remind you it’s healthy to smell the roses along the way.
The Journey to Financial Freedom Starts Here
Financial planning isn’t a one-time event. Instead, it’s an ongoing process that helps you to achieve your financial goals and security, whether you’re building a business or investing for retirement. The best plans are comprehensive, personalized, and tailored to your unique needs and financial situation. The best plans are also developed, implemented, and managed with the help of a 100% objective fiduciary advisor.
Following the financial planning process steps outlined in this guide, you can get a great start on creating your financial plan. Whether you’re just starting or already have a plan, we’d be happy to come alongside you to develop that plan or just give you a confirming second opinion. Take advantage of our 45+ year history in helping clients achieve their financial goals and dreams.
Greg Welborn is a Principal at First Financial Consulting. He works with high-net-worth individuals and privately-owned businesses on financial planning issues including investment, retirement, and tax planning, among others.
Greg Welborn is a Principal at First Financial Consulting. He works with high-net-worth individuals and privately-owned businesses on financial planning issues including investment, retirement, and tax planning, among others.
